AUD/USD drops on Iran conflict rhetoric and firm US data
- AUD/USD drops as remarks from Donald Trump escalate conflict rhetoric with Iran.
- ISM Prices Paid surge to three-year high, tempering dovish bets on the Federal Reserve.
- Traders await comments from Michele Bullock amid heightened geopolitical uncertainty.
The Australian Dollar register loses versus the Greenback following over-the-weekend developments, which triggered a flight to safety, weighing on the AUD/USD pair. At the time of writing, it trades at 0.7083, down 0.37%.
Aussie weakens as Middle East escalation, firm US data fuel haven demand
Sentiment remains negative after the US President Donald Trump threatened that attacks on Iran are going to continue for four or five weeks. He added that the “big wave” in the war with Iran is yet to come.
Last week, an attack of US and Israeli forces eliminated Iran’s Ayatollah Ali Khamenei on Saturday. Since then, tensions escalated with Tehran retaliating against US bases within Gulf state countries and launched a missile against a UK airbase in Cyprus.
Aside from this, economic data in the US revealed that manufacturing activity steadied, despite retreating moderately. The ISM Manufacturing Purchasers Manager Index (PMI) in February came at 52.4 down from 52.6 a month ago but expanded for the second consecutive month.
The ISM Prices Paid sub-component rose to its highest level in three and a half years, from 59.0 in January to 70.5, the highest since October 2022.
Given the backdrop of a resilient US economy and the jump in high Oil prices, prompted money markets to priced in a less dovish Federal Reserve throughout the year. Last Friday, money markets priced in 60 basis points of easing. At the time of writing, they expect the Fed to cut 48 basis points.
Consequently, the US Dollar remains bid as depicted by the US Dollar Index (DXY). The DXY which measures the buck’s performance against a basket of six currencies, gains 0.83% up at 98.45 a tailwind for the AUD/USD pair.
Traders’ eyes on central bankers, Bullock from the RBA and Williams of the Fed
Later, the Reserve Bank of Australia (RBA) Governor Michele Bullock will cross the newswires on Tuesday and is expected to answer questions regarding heightened geopolitical tensions.
In the US, Regional Federal Reserve Presidents John Williams from New York and Jeffrey Schmid from Kansas City, will grab the headlines, amid an absence of US economic data releases.
AUD/USD Price Forecast: Technical outlook
In the daily chart, AUD/USD trades at 0.7102. The near-term bias is bullish as spot holds comfortably above the rising cluster of simple moving averages, which trail the market in the 0.68 area and confirm an established uptrend rather than a late breakout. The RSI around 62 keeps momentum on the buyers’ side without showing overbought stress, while price continues to respect the two upward-sloping support trend lines from 0.6673 and 0.6897, reinforcing a pattern of higher lows.
Immediate support aligns with the inner rising trend line near 0.7090, with a break exposing the 0.7050 area and then firmer demand around 0.7000, where prior reaction lows converge. On the upside, initial resistance emerges at last week’s high near 0.7125, followed by the 0.7170 region, which coincides with the projected break level of the broader ascending trend line. A daily close above 0.7170 would open the way toward the 0.7250 zone, while failure to defend 0.7000 would weaken the bullish structure and shift focus back toward the mid-0.69s.
(The technical analysis of this story was written with the help of an AI tool.)
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.
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