Australian Dollar weakens amid Middle East tensions, cool inflation
- The Australian Dollar remains under pressure as rising Middle East conflict drives safe-haven demand toward the US Dollar.
- Cooler-than-expected August inflation reduced market expectations for another Reserve Bank of Australia interest rate hike in November.
- Soft domestic economic data leaves the Aussie vulnerable despite the RBA holding rates at a 15-year high.
AUD/USD inches lower after registering modest gains in the previous day, trading around 0.6940 during European hours on Monday. The pair remains subdued as the US Dollar (USD) gains ground on rising safe-haven demand, driven primarily by deteriorating geopolitical conditions in the Middle East. Investors are closely monitoring global risk sentiment while awaiting the release of the US ISM Services Purchasing Managers Index later in the day for further direction.
Geopolitical tensions escalated sharply after Saudi-backed forces in Yemen launched a major offensive to reclaim territory from Houthi forces. The conflict intensified further following the Iran-aligned group's seizure of the Bab el-Mandeb strait, a critical maritime chokepoint linking the Red Sea to the Gulf of Aden that provides a vital bypass route for regional crude exports avoiding the Strait of Hormuz.
At the same time, shifting expectations surrounding Federal Reserve monetary policy continue to anchor market dynamics. Softer-than-expected US employment figures prompted financial markets to price in nearly a 77.9% probability that the Fed will hold benchmark interest rates steady at its upcoming policy meeting, up from 74% prior to the labor report. This adjustment reflects growing consensus that a cooling job market will induce US policymakers to keep rates at baseline levels.
Meanwhile, the Australian Dollar (AUD) continues to struggle after August inflation figures came in below estimates, dampening expectations for another interest rate increase in November. This moderation in domestic price pressures comes even after the Reserve Bank of Australia (RBA) raised its cash rate to a 15-year high of 4.6% in September, leaving the Aussie vulnerable to broader US Dollar strength.
Technical Analysis:
In the daily chart, AUD/USD trades at 0.6940, extending its decline below both the short-term and medium-term exponential moving averages, which keeps the near-term bias bearish. The nine- and 50-period Exponential Moving Averages (EMAs) both sit overhead, suggesting the pair remains under downside pressure while rallies are likely to be capped by these dynamic resistance levels. The 14-day Relative Strength Index (RSI) at 29.3 has slipped into oversold territory, hinting that while the broader tone is negative, the pace of the recent slide could start to moderate if selling fatigue emerges.
On the topside, initial resistance is located at the nine-period EMA near 0.6987, followed by the denser barrier at the 50-period EMA around 0.7069, where any recovery would face a more meaningful technical hurdle. On the downside, the next notable support sits at the prior horizontal level around 0.6667, which marks a structural floor for the current bearish cycle and would be the zone to watch if selling resumes after any short-lived corrective bounce.
Logan’s hawkish tilt lifts Fed expectations and supports the Dollar
Fed’s Logan delivered a notably more hawkish message, with an FXS Speechtracker score of 9.2/10 compared to the established baseline of 8.1/10, underscoring a stronger conviction that policy must tighten further. The key remark that higher yields may reflect increased term premiums, potentially lowering the need for additional tightening, sits in tension with explicit calls for at least 50 bps more in rate hikes and several moves to reverse last fall’s reductions, reinforcing a message that current policy is not yet restrictive enough. Overall, the emphasis on a strengthening economic expansion, a well-balanced labor market, and the need to revive price stability points to a Fed stance that is firmly supportive of the Dollar.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
