Australian Dollar gains as Mideast tensions ease, RBA rate expectations rise
- AUD/USD rises as falling oil prices and a pause in the Middle East conflict weigh on the US Dollar.
- US military caution and depleted interceptor supplies help curb further escalation with Iran for now.
- Strong Australian June employment data boosts expectations of another RBA rate hike following upcoming inflation reports.
AUD/USD extends its gains for the second consecutive trading day, hovering near 0.7000 during the Asian hours on Monday. The pair appreciates as the US Dollar (USD) declines alongside a sharp drop in oil prices. This movement followed the United States (US) decision to refrain from striking Iran over the weekend, paired with Tehran suspending its own retaliatory strikes.
The brief US-Iran pause came after 13 days of escalating conflict. However, market participants remain cautious about potential supply disruptions as Iran-backed Houthis in Yemen claimed responsibility for attacks on Saudi Arabian facilities along the Red Sea.
While the US did not officially disclose its reasons for halting the strikes, reports suggest growing concerns over depleting interceptor supplies and a shortage of remaining targets within Iran. Additionally, General Dan Caine, Chairman of the Joint Chiefs of Staff, reportedly cautioned President Trump on Friday that continuing the campaign would severely strain critical munitions reserves.
Beyond geopolitical developments, investors are bracing for the upcoming Federal Reserve (Fed) policy meeting. The Fed is widely expected to hold interest rates steady on Wednesday before resuming rate hikes in September, though a minority of market participants still anticipate a surprise move at this week's meeting.
Meanwhile, strong June employment data out of Australia has reinforced expectations of further monetary tightening by the Reserve Bank of Australia (RBA), which has already raised rates three times this year. Investors are now closely watching the June and Q2 inflation figures due later this week, as persistent price pressures continue to dominate the local outlook.
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.
