Aussie Dollar Stuck Near 0.7050 as RBA Support Fades

Key Moments

Range-Bound Trade Around 0.7050

The AUD/USD pair is extending its sideways pattern around the 0.7050 level during the Asian session on Thursday, with price action confined to a familiar consolidation zone. The move follows a pause in the prior session’s retreat from the highest level seen since June 5, as the market waits for a new catalyst to define the next leg of direction.

Monetary Policy Dynamics Support AUD

The US Dollar is struggling to build on its solid rebound from Wednesday. Signs that inflation pressures in the United States are moderating have tempered expectations for an imminent interest rate increase by the Federal Reserve. This shift in rate expectations is weighing on the Greenback.

At the same time, the Reserve Bank of Australia’s more hawkish outlook is providing a counterbalance in favor of the Australian Dollar. RBA Governor Michele Bullock highlighted that inflation risks remain tilted to the upside and stated that the board stands ready to raise rates again if price pressures do not show adequate progress lower. This stance is lending support to AUD and, by extension, the AUD/USD exchange rate.

Geopolitical Tensions Curb AUD Upside

Market participants remain focused on inflation risks linked to volatile oil prices in the context of the US-Iran standoff. President Donald Trump said the US had total control over the Strait of Hormuz, while Iran reiterated its own control over this key shipping channel. These developments are keeping geopolitical risk elevated.

The heightened uncertainty is acting as a tailwind for the safe-haven US Dollar, which in turn is limiting the upside for AUD/USD. Against this backdrop, and given the recent range-bound activity near 0.7050, many market participants may prefer to wait for convincing follow-through buying before positioning for a continuation of the one-and-a-half-month-old uptrend.

Upcoming US Data and Event Risk

Attention now turns to the US economic calendar, which includes the release of the Producer Price Index and the standard Weekly Initial Jobless Claims figures. These data points, together with remarks from key Federal Open Market Committee members, are expected to steer demand for the US Dollar later in the North American session.

In addition, traders are likely to monitor further developments related to the Middle East situation. Any escalation or easing in the crisis could inject additional volatility into financial markets and create short-term trading opportunities in AUD/USD.

AUD/USD Technical Picture

From a technical perspective, AUD/USD retains a mildly bullish short-term bias as it trades near the 100-day Simple Moving Average at 0.7056. However, the absence of strong follow-through buying suggests caution is warranted before anticipating additional gains.

A daily close below the 100-day SMA would undermine the constructive tone and potentially open the door to a move toward recent lows around the 0.7000/0.6950 area.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Australian Dollar: Background Drivers

Key Influences on AUD

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.

RBA Policy Transmission to 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’s Role in AUD Performance

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 and Trade Balance Effects

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.