Australian Dollar gathers strength above 0.7000 amid softer US GDP data
- AUD/USD gains ground to around 0.7035 in Friday’s early Asian session.
- Markets continue to fully price in one more RBA rate hike this year.
- US GDP slowed in the second quarter of 2026.
The AUD/USD pair gathers strength to near 0.7035, the highest since June 17, during the early European session on Friday. Expectations that the Reserve Bank of Australia (RBA) might implement another interest rate hike this year underpin the Australian Dollar (AUD) against the US Dollar (USD).
The RBA hawkish bias has prompted markets to continue to fully price in one more rate hike this year, which would take the Official Cash Rate (OCR) to 4.6%, lifting the Aussie. RBA Governor Michele Bullock on Tuesday warned that underlying inflation remained too high and a further slowdown in domestic demand may be required to tame prices. Bullock added that policymakers were prepared to raise interest rates again if needed.
"The Board is prepared to act as required to achieve its mandate, including by increasing the cash rate further if needed,” said Bullock.
The downbeat US economic data could also weigh on the Greenback and act as a tailwind for the pair. Data released by the Bureau of Economic Analysis on Thursday showed that the US Gross Domestic Product (GDP) grew by 1.5% in the second quarter (Q2) of 2026, marking a slowdown from 2.1% growth in Q1. This figure came in weaker than the market expectation of 2.1%.
On the other hand, escalating tensions in the Middle East could boost safe-haven flows, supporting the USD. Iranian Parliament Speaker Mohammad Bagher Ghalibaf on Thursday denounced the US attack on civilian homes on Qeshm Island, describing it as a continuation of American crimes in the southern Iranian cities of Minab and Lamerd. Earlier Thursday, the US launched missile strikes across southern Iran, including Qeshm Island as well as parts of Bushehr, Fars and Khuzestan provinces.
RBA keeps pressure on prices as labour market stays resilient
BNY’s Geoff Yu notes that RBA Assistant Governor Sarah Hunter reiterated that “inflation remains above the 2-3% target band” and stressed the central bank “must keep pressure on price growth so higher inflation expectations do not become entrenched.” On the labour side, Yu highlights Hunter’s assessment that conditions are “still somewhat tight,” with job growth having held up “not too badly” in the first half of the year, underscoring the RBA’s cautious stance even as headline price pressures have eased slightly.
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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