Australian Dollar remains subdued as Consumer Inflation Expectations fall in July
- AUD/USD struggles as the Australian Dollar remains weaker following the release of the Consumer Inflation Expectations.
- US strikes on Iranian assets and a new naval blockade have triggered a massive surge in safe-haven asset demand.
- Fed Chair Kevin Warsh called current inflation temporary on Wednesday.
AUD/USD loses ground after two days of gains, trading around 0.7000 during the Asian hours on Thursday. The pair remains in negative territory as the Australian Dollar (AUD) holds losses following the release of the Consumer Inflation Expectations, which fell by 0.8% in July to 4.7%, from 5.5% prior.
Following the spike in trimmed mean inflation expectations recorded in April, inflation expectations have moderated for a third month running. Wage expectations, by comparison, have remained unchanged for the past eight months.
The AUD/USD pair depreciates as the safe-haven demand surges in response to aggressive US military actions. The US has launched multiple waves of strikes against Iranian coastal military assets and reinstated a naval blockade of Iran.
The Guardian reported that US Central Command (CENTCOM) launched yet another wave of strikes in a concerted effort to keep the critical Strait of Hormuz waterway open. In a direct escalation, CENTCOM confirmed that US aircraft fired missiles into an oil tanker’s smokestack within the strategic passage, effectively disabling the vessel and keeping global markets on edge.
Unpredictability surrounding the conflict heightened after US President Donald Trump stated to reporters that he "does not like giving deadlines" when questioned on whether Iran faces a strict timeline before the US begins targeting domestic infrastructure, such as Iranian bridges.
Federal Reserve (Fed) Chair Kevin Warsh said on Wednesday that current inflation pressure will not be permanent, while acknowledging that the latest inflation measures remain unsatisfactory.
Warsh downplays inflation signal from AI, keeps Fed tone steady for Dollar
Fed Chair Warsh’s testimony scores 5.4/10 on the FXS Speechtracker, notably softer relative to the historical average of 7/10 and signaling a more cautious, nuanced tone. By calling recent inflation data an “imperfect gauge” of underlying pressures and framing AI as a source of both disruption and long-run job and wage gains, Warsh emphasizes uncertainty around the inflation path while stressing that whether AI proves inflationary ultimately depends on Fed policy. The net effect is a balanced message that tempers hawkish conviction, limiting immediate implications for the Dollar and broader risk sentiment.
The FXS Fed Sentiment Index was unchanged, moving 0.00 points to remain at a firmly hawkish 126.13, indicating that despite the softer speech score, the broader policy backdrop still leans toward a tightening bias. The combination of a steady FXS Fed Sentiment Index and a below-baseline FXS Speechtracker reading suggests markets will see Warsh’s AI remarks as a refinement of the inflation narrative rather than a shift away from the existing hawkish stance.
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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