AUD/USD steadied near 0.7170 in early European trade on Monday after two sessions of declines, with the Australian dollar supported by easing safe-haven demand tied to expectations of a United States–Iran accord. Reports point to the two countries moving towards an agreement based on a 60-day ceasefire extension. Under the outlined framework, the Strait of Hormuz would reopen, Iran would clear mines and allow free passage for shipping, while the United States would lift its blockade on Iranian ports.
The Australian dollar’s outlook against the US dollar faced headwinds as expectations for further monetary tightening by the Reserve Bank of Australia weakened after softer labour-market data. Australia’s unemployment rate rose to 4.5% in April from 4.3% in March, the highest in about four and a half years, and Westpac pricing showed the implied chance of a hike at the next RBA meeting falling to 3% from 13% before the release. Support for the greenback was also underpinned by sticky US inflation, with the CME FedWatch tool indicating a near 41.0% probability of a 25-basis-point Federal Reserve rate increase by year-end.
Geopolitical Developments and Short-Term AUD/USD Dynamics
We are observing the AUD/USD pair finding temporary support around the 0.7170 level, primarily due to positive geopolitical news. The potential for a US-Iran agreement is reducing safe-haven demand for the US dollar, which is giving the Australian dollar a slight boost. This temporary strength is creating an interesting dynamic for traders to consider.
The proposed 60-day ceasefire and reopening of the Strait of Hormuz is a significant risk-on catalyst that could lift the AUD further in the immediate term. Should the deal be formally announced, we could see a quick move higher as markets price out geopolitical risk. However, we believe this strength may be short-lived and could present a selling opportunity.
Fundamental and Technical Factors Influencing AUD/USD
Fundamentally, the outlook for the Australian dollar is weakening, especially following the recent jobs report. The unexpected jump in unemployment to 4.5%, a multi-year high, has effectively removed the prospect of a near-term interest rate hike from the Reserve Bank of Australia. This monetary policy divergence with the US Federal Reserve is a key bearish factor for the pair.
Adding to the pressure, prices for iron ore, Australia’s key export, have recently softened, falling below $100 per tonne on concerns over global industrial demand. Historically, a combination of a dovish RBA and falling commodity prices has weighed heavily on the currency. We saw a similar pattern throughout late 2023, which resulted in a sustained downtrend for the AUD/USD.
Conversely, the case for the US dollar remains firm due to stubborn inflation. Last week’s Core PCE data for April came in at 3.1% year-over-year, which is keeping the possibility of another Federal Reserve rate hike on the table. The CME FedWatch tool’s 41% probability of a hike by year-end underscores this sentiment and should limit significant US dollar downside.
Given these conflicting signals, we see an opportunity in using options to express a bearish view over the coming weeks. Selling call spreads with strike prices above the 0.7250 resistance level could allow traders to collect premium while betting that any geopolitical rally will fade. Alternatively, buying put options can provide downside exposure as the market refocuses on the widening interest rate differential between the US and Australia.
