The Australian dollar strengthened against the US dollar in early Asian trading on Monday, hovering around the 0.7040 mark. US President Donald Trump cancelled a planned military strike on Iran, citing an "imminent deal" on the nuclear program and the full reopening of the Strait of Hormuz, which significantly improved risk appetite and provided support for the Aussie.
The Reserve Bank of Australia's hawkish stance continues to offer structural support for the Australian dollar, with the market fully pricing in at least one more rate hike this year. However, Iranian officials dismissed Trump's claims as "just another new lie," keeping geopolitical uncertainty high.
The cancellation of the strike boosted risk sentiment, but Iran's denial of negotiation requests capped gains. The primary driver for the AUD's strength was improved risk appetite, with Trump stating on Saturday that the strike was called off based on expectations of an imminent deal and responses to requests from Iran and other regional nations. Traders are closely monitoring US-Iran developments—any positive progress could provide further support for risk assets like the AUD. However, uncertainty remains elevated, as Iranian media reported that officials labeled Trump's claim of a "Tehran request for pause" as false, emphasizing that armed forces are "on high alert, ready for any scenario." Ongoing tensions in the Middle East may drive safe-haven flows into the US dollar, pressuring the AUD.
The RBA's hawkish stance continues to underpin the Australian dollar. The market has fully priced in at least one more rate hike this year. Governor Michele Bullock warned last week that core inflation remains too high, potentially requiring further moderation in domestic demand to curb prices, and stated that policymakers are "prepared to raise rates again if necessary." Analysts at Bank of New York Mellon noted that RBA Assistant Governor Chris Kent reiterated the need to maintain a restrictive policy stance, emphasizing that inflation is "still above the 2-3% target range" and that pressure must be kept on price growth to prevent higher inflation expectations from becoming entrenched. On the labor front, Kent described the jobs market as "still slightly tight," with employment growth in the first half of the year "holding up well," highlighting labor market resilience.
Three key variables are currently shaping the AUD's trajectory. In the US-Iran situation, a substantive breakthrough in negotiations and a significant reduction in geopolitical risk would likely boost global risk appetite, supporting the risk-sensitive AUD and potentially breaking it out of its recent trading range. Chinese PMI data is also pivotal. As Australia's largest trading partner, stronger-than-expected manufacturing and non-manufacturing PMI readings would directly boost demand expectations for commodities, benefiting Australian exports and economic growth prospects, thereby providing strong support for the AUD. Additionally, RBA rate hike expectations cannot be ignored. If the market continues to price in further rate increases, the interest rate advantage would strengthen the AUD's appeal, attracting capital inflows and offering medium-term support. Collectively, if these variables align, the AUD's upside potential could be further unleashed.
The Australian dollar is balancing risk appetite against uncertainty. The AUD/USD pair strengthened to around 0.7040 on the back of Trump's cancellation of the strike on Iran, with improved risk appetite as the main driver. The RBA's hawkish stance provides structural support, with the market fully pricing in at least one more rate hike this year. However, Iran's denial of negotiation requests and ongoing geopolitical uncertainty limit the AUD's upside. In the short term, the pair is likely to trade in a 0.6980-0.7060 range. If substantial progress is made in US-Iran talks and Chinese PMI data comes in strong, the AUD could break above the 0.7060 resistance. Conversely, if geopolitical risks escalate, the AUD may retest the 0.6980 support. The medium-term direction for the AUD remains dependent on the dynamic interplay between the RBA's policy path and global risk appetite, as well as the evolution of the US-Iran situation.
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