Australian Dollar declines as disappointing GDP, firm US data bolster USD

• The Australian Dollar weakens after Australian GDP growth misses expectations in the first quarter.
• The US ISM Services PMI accelerates more than expected in May, supporting the US Dollar.
• Middle East geopolitical tensions and rising inflation components in the ISM survey further underpin the Greenback.

AUD/USD trades around 0.7145 on Wednesday at the time of writing, down 0.50% on the day. The pair remains under pressure after the release of several disappointing Australian economic indicators, while solid US data continues to support the US Dollar (USD).

The Australian economy expanded by 0.3% QoQ in the first quarter, down from 0.8% in the previous quarter and below market expectations of 0.5%. On an annual basis, Gross Domestic Product (GDP) grew by 2.5%, missing the consensus forecast of 2.7%. The figures confirm a loss of economic momentum and reinforce expectations that the Reserve Bank of Australia (RBA) will maintain a cautious policy stance.

Investors have also digested a rise in Australia’s Unemployment Rate to its highest level in about four and a half years, alongside softer recent inflation data, reducing the need for further monetary tightening. UOB expects the central bank to keep its cash rate at 4.35% for an extended period, while TD Securities believes one final 25-basis-point rate hike remains possible later this year as growth continues to run above potential.

In the United States (US), data released on Wednesday supports the Greenback. The Institute for Supply Management (ISM) reported that its Services Purchasing Managers Index (PMI) rose to 54.5 in May from 53.6 in April, beating market expectations of 53.8. The Prices Paid component also increased to 71.3 from 70.7, signaling that inflationary pressures remain elevated.

These figures largely offset the slight disappointment from the S&P Global Services PMI, which was revised down to 50.7 in May from the initial release of 50.9. Meanwhile, the Automatic Data Processing (ADP) report showed that US private employment increased by 122K jobs in May, above expectations of 117K, highlighting the continued resilience of the labor market.

The geopolitical backdrop also remains supportive of the Greenback. Concerns surrounding tensions between the United States and Iran continue to boost demand for safe-haven assets. US President Donald Trump stated that Iran has agreed not to acquire nuclear weapons, while noting that discussions with Iranian authorities remain ongoing.

The strength of the US Dollar, fueled by robust US economic data and a risk-averse market environment, continues to dominate market sentiment and keeps downward pressure on AUD/USD.