Australian Dollar softens below 0.7050 on risk-off mood, China's Manufacturing PMI data looms
- AUD/USD edges lower to near 0.7025 in Monday’s early Asian session.
- Iran warns of expanded strikes against the US, boosting safe-haven flows.
- The RBA is expected to hike interest rates to the highest level in 18 years.
The AUD/USD pair declines to around 0.7025 during the early Asian session on Monday. The US Dollar (USD) strengthens against the Australian Dollar (AUD) amid elevated geopolitical tensions in the Middle East. China’s RatingDog Manufacturing Purchasing Managers Index (PMI) report is due later on Monday. Traders will closely monitor the Reserve Bank of Australia (RBA) interest rate decision on Tuesday.
Bloomberg reported on Sunday that Iran’s Supreme Leader ordered his top military commanders to prepare for renewed confrontation with the US and Israel and expand Tehran’s options for retaliation. Ongoing tensions in the Middle East could boost a safe-haven currency such as the Greenback in the near term.
“Every level and type of threat must be met with an immediate, effective response, without geographical limitations,” said Khamenei.
Last week, the US Federal Reserve (Fed) left its benchmark federal funds rate unchanged at 3.75% to 4%. Policymakers stated that they hoped incoming data would help inform their next decision. Traders are pricing in a 72.9% chance of a hike in December, according to the CME FedWatch tool.
However, growing expectations for an imminent interest rate hike might help limit the Aussie’s losses. The Australian central bank is likely to raise its Official Cash Rate (OCR) by 25 basis points (bps) to 4.85% from 4.60% at its November policy meeting on Tuesday.
The RBA is ramping up efforts to gain control over Australia’s sticky inflation, which is among the strongest in the developed world.
Markets are now pricing in nearly 78% odds of an interest rate increase to 4.85% at the next RBA Board meeting, up from 62% before the data was released, according to the ASX RBA Rate Tracker.
RBA pricing limits scope for further Aussie gains
According to TD Securities, the market is already assigning a substantial probability to further tightening from the RBA, with investors currently pricing “around an 80% chance of a November RBA rate hike.” Strategists note that, “unlike central bank rate hike pricing elsewhere in the world, the market is hesitant to price in more RBA rate hikes in the coming months, in line with our call.” As a result, TD argues that “with the market already pricing in another RBA rate hike in the near term, we would not expect the central bank decision to lend much further support for the AUD,” suggesting limited scope for additional currency upside purely on the back of policy expectations.
Logan flags at least two more hikes as Fed aims for modestly restrictive stance
Fed's Logan delivered a distinctly hawkish message, with an FXS Speechtracker score of 8/10, slightly above the established baseline of 7.7/10, underscoring a firmer tightening bias. The insistence that the Fed "needs at least two more quarter-point rate hikes" and that skipping a meeting does not alter the policy destination signals a clear commitment to pushing rates into modestly restrictive territory to tackle what is described as "unacceptable" inflation. Emphasis on gradual adjustments and clear communication suggests the Fed is trying to balance further tightening with limiting the risk of sharp economic deterioration while allowing households, businesses, and investors to adapt to higher rates.
The FXS Fed Sentiment Index rose by 0.95 points to 143.62, reinforcing that the broader policy tone remains firmly in hawkish territory well above the neutral 100 mark. This move, aligned with the elevated FXS Speechtracker score, reflects market perceptions that strong growth, solid consumer spending, and still-supportive financial conditions leave room for additional tightening in the Dollar bloc and beyond.
Technical Analysis: AUD/USD remains capped under the 100-day SMA
In the daily chart, AUD/USD is capped just beneath the 100-day simple moving average (SMA), while still holding above the Bollinger middle band, leaving the near-term tone neutral-to-bearish as price compresses between these opposing references. The Relative Strength Index (RSI) at about 52 sits near the midline, suggesting only modest positive momentum that does little more than temper the downside risk while the broader structure remains constrained below the 100-day SMA.
On the topside, immediate resistance is seen at the 100-day SMA at 0.7030, with the next barrier at the upper Bollinger band near 0.7065, where a daily close above would be needed to shift the bias toward a more constructive recovery. On the downside, initial support is provided by the Bollinger middle band around 0.6995, ahead of a deeper cushion at the lower band near 0.6925, where a break would reopen the path toward a more pronounced bearish extension.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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