• AUD/USD trades flat around 0.7040 on Wednesday amid the Middle East war.
• Australia’s economic growth beats expectations in the fourth quarter but fails to support the Australian Dollar.
• Investors now await the US ISM Services PMI and Friday’s NFP report for further clues on the Fed’s policy path.

AUD/USD trades with little direction on Wednesday, hovering around 0.7040 at the time of writing. The US Dollar (USD) is losing some momentum as investors monitor escalating geopolitical tensions in the Middle East, where air and missile strikes by the United States (US) and Israel against targets in Iran have been followed by retaliatory attacks from Tehran targeting US bases across the region. This situation continues to fuel uncertainty in global markets and supports some demand for safe-haven assets.

According to reports from The New York Times, Iran may have signalled openness to indirect talks with Washington through backchannel communications involving the Central Intelligence Agency (CIA). However, US officials remain cautious about the prospects for near-term negotiations, suggesting that the military confrontation could continue to shape market sentiment in the coming days.

On the macroeconomic front, US data delivered mixed signals. The Automatic Data Processing (ADP) Employment Change report showed that private-sector employment increased by 63K jobs in February, beating expectations of 50K. Despite the upside surprise, ADP Chief Economist Nela Richardson noted that hiring remains concentrated in a limited number of sectors.

Comments from US Treasury Secretary Scott Bessent also drew market attention. He expressed confidence in the outlook for job creation this year and stressed that sustainable employment growth should be driven by the private sector. He also suggested that tariffs could temporarily rise to around 15% while ongoing trade policy reviews are conducted.

In Australia, growth data released by the Australian Bureau of Statistics (ABS) showed that the economy expanded by 0.8% in the fourth quarter, up from 0.5% in the previous quarter and above market expectations of 0.6%. On an annual basis, Gross Domestic Product (GDP) rose by 2.6%, accelerating from 2.1% previously and also surpassing the 2.2% consensus forecast. This performance highlights the resilience of domestic demand and supports expectations that the Reserve Bank of Australia (RBA) will maintain a cautious monetary policy stance.

However, activity indicators present a more nuanced picture. The S&P Global Australia Services Purchasing Managers Index (PMI) declined to 52.8 in February from 56.3 in January, while the Composite PMI eased to 52.4. Although private-sector activity continues to expand for the seventeenth consecutive month, the pace of growth has moderated since the start of the year.

According to Lee Sue Ann, economist at UOB, Australia’s economic resilience is supported by household spending and private investment, but the outlook remains uneven due to persistent inflation and the uncertain geopolitical environment. The bank expects the RBA to wait for the next quarterly inflation report before adjusting policy, with a potential move at the May 5 meeting.

Investors now turn their attention to the release of the Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI) later on Wednesday. However, the Nonfarm Payrolls (NFP) report due on Friday remains the key event for assessing the strength of the US labor market and the next steps from the Federal Reserve (Fed).