AUD/USD slides back into 0.70 as market data lumps in with sentiment drivers
- The Australian Dollar broke below 0.7000 after March flash PMIs showed services activity contracting at the fastest pace in over a year.
- Australia's March flash composite PMI plunged to 47.0 from 52.4, with the services index dropping to 46.6 as the Middle East conflict and surging energy costs weigh heavily on business activity.
- Tuesday's US S&P Global flash PMIs are the first major American activity readings since the Iran conflict began; Australian February CPI follows on Wednesday with headline YoY consensus at 3.8%.
AUD/USD walloped both sides of the bid on Monday, sliding to about 0.6980 and extending a sharp pullback from the March high near 0.7120. The pair has now dropped over 200 pips from that peak in less than a week, breaking below the 0.7000 round number for the first time since early February. Despite an overall uptick in top-to-bottom volatility, Monday's session ended narrow on the day, with a muted change between opening and closing bids pointing to hesitation ahead of Tuesday's market session.
Australia's flash Purchasing Managers' Index (PMI) data for March landed late on Monday and painted a grim picture. The composite index fell sharply to 47.0 from 52.4 in February, dragged lower by a collapse in the services reading to 46.6 from 52.8. Manufacturing held just above the 50 expansion threshold at 50.1, down from 51. The data are the first hard signal that the Strait of Hormuz disruption and the associated surge in energy costs are feeding through to domestic activity, complicating the Reserve Bank of Australia's (RBA) tightening stance. The RBA hiked rates 25 basis points to 4.10% just last week in a tight 5-4 vote, its second consecutive increase, with Governor Michele Bullock stressing that inflation was already too high before the war.
Markets are still pricing a meaningful chance of another move in May, but a sustained deterioration in activity data could force a rethink. Wednesday's February Consumer Price Index (CPI) release is the next test, with headline inflation expected to hold at 3.8% YoY and the trimmed mean at 3.4%.
On the US Dollar side, the Federal Reserve (Fed) held rates at 3.50% to 3.75% at its March 18 meeting in a near-unanimous 11-1 vote, with updated projections still pointing to one cut later this year. Chair Jerome Powell struck a cautious tone, noting that the economic impact of the Iran conflict is uncertain and that progress on inflation has been slower than hoped. Tuesday brings the US flash PMI readings for March, the first snapshot of American business activity since the war started, alongside fourth-quarter productivity and unit labor cost data.
AUD/USD 1-hour chart
Technical Analysis
In the 1-hour chart, AUD/USD trades at 0.7013. The near-term bias is mildly bullish after the pair rebounded from sub-0.6950 levels and reclaimed the 0.7000 handle, while the price still holds below the gently descending 200-period EMA near 0.7050, which caps a stronger upside extension for now. The Stochastic RSI has recovered from oversold territory and now sits in an elevated region, showing improving upside momentum but also hinting that buying pressure is becoming stretched as spot approaches the medium-term average.
Initial resistance emerges at 0.7030, the recent intraday high, followed by the 0.7050 area where the 200-period EMA aligns as a stronger barrier. A break above this zone would open the way toward the 0.7070 region next. On the downside, immediate support stands at 0.7000, guarding a deeper pullback toward 0.6980, with a further slide exposing 0.6950, where the latest advance began and buyers previously regained control.
(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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