AUD/USD dips as Trump delays Iran decision, US Dollar strengthens on policy divergence
- AUD/USD slips below 0.6480 as July RBA rate cut bets drag the Australian Dollar lower
- The US Dollar holds firm as Trump delays Iran bombing decision, but ongoing Middle East tensions sustain safe-haven demand.
- AUD/USD traders await Fed Daly’s speech and June PMI data, key weekend events that could guide the direction of next week.
The Australian Dollar (AUD) remains under pressure against the US Dollar (USD) on Friday, with AUD/USD trading near 0.6480 at the time of writing.
Global risk sentiment continues to deteriorate, supporting safe-haven demand for the US Dollar, while domestic weakness and dovish expectations from the Reserve Bank of Australia (RBA) further weigh on the Australian Dollar.
Geopolitical uncertainty remains a dominant theme after US President Trump delayed a decision on direct US involvement in the Israel–Iran conflict.
While the announcement of a two-week window eased immediate fears, lingering volatility in the region has kept markets on edge and sustained demand for the US Dollar.
Meanwhile, the Federal Reserve’s (Fed) cautious tone following its June policy meeting reaffirmed expectations for a gradual, data-dependent path of rate cuts.
Combined with elevated oil prices driven by Middle East tensions, this hawkish backdrop has reinforced inflation concerns and bolstered the case for higher rates to remain elevated for the long term.
On the domestic front, Australian Treasurer Jim Chalmers, speaking on Tuesday, flagged persistent structural challenges in productivity, resilience and fiscal sustainability. He called for long-term reforms, including tax policy, to strengthen the country’s economic foundation. His remarks come as markets increasingly price in a potential RBA rate cut in July, particularly amid recent soft data.
The case for easing was reinforced by Australia’s May employment report, released on Thursday, which showed a surprise 2.5K drop in total jobs, missing forecasts for a 25K gain. While full-time employment rose by 38.7K, it was offset by a 41.1K fall in part-time jobs.
The unemployment rate remained steady at 4.1%, but the weak headline print dragged AUD/USD to a two-week low, reinforcing the dovish shift in RBA expectations.
Looking ahead, traders will monitor two key events over the weekend that could influence the direction of AUD/USD.
On Sunday, San Francisco Fed President Mary Daly is scheduled to speak at the Western Economic Association International’s 100th Annual Conference. Her comments on inflation or the policy outlook could influence expectations for a September Fed rate cut and impact US Dollar sentiment.
Later that evening, markets will shift focus to Australia’s June S&P Global Purchasing Managers’ Index (PMI) release, covering the Composite, Manufacturing, and Services sectors. As early indicators of economic momentum, the reports, especially the Services PMI, will be closely watched for signs of domestic strength or weakness. Softer readings may reinforce calls for an RBA cut, while stronger data could offer temporary support to the Australian Dollar.
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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