AUD/USD edged lower after opening with a bullish gap, yet it stayed in positive territory and traded near 0.7160 in Asian hours on Friday. The pair was pressured as the Australian Dollar weakened following a sharp downgrade in expectations for further Reserve Bank of Australia rate rises. A softer April inflation print, weak consumer spending and a cooling labour market have led traders to conclude that earlier RBA tightening is feeding through, prompting an aggressive repricing of the odds of a June hike. Attention now turns to next week’s manufacturing PMI survey, trade balance data and GDP figures for a clearer read on momentum.
External drivers were mixed, with risk tone offering some support as oil prices eased on reports of a tentative 60-day ceasefire extension between the US and Iran. The proposal would allow unrestricted shipping via the Strait of Hormuz, and Iran is said to be ready to clear all maritime mines within 30 days, although caution persists on whether an agreement is finalised. MUFG Bank sees scope for the US Dollar to rise if talks fail, as renewed disruption risks higher inflation, firmer US Treasury yields and a more hawkish Federal Reserve stance.
RBA Expectations and Domestic Data Weigh on the Australian Dollar
We see the Australian dollar’s primary weakness coming from the shift in expectations for the Reserve Bank of Australia. Market pricing now implies only a 15% chance of a rate hike in June, a dramatic collapse from over 70% just last month. This makes it difficult to justify long AUD positions based on interest rate differentials.
All eyes are now on next week’s GDP figures for confirmation of this economic slowdown. The latest monthly CPI indicator from the Australian Bureau of Statistics showed inflation falling to 3.1%, suggesting a persistent cooling trend reminiscent of the sluggish growth seen through much of 2024. Therefore, we believe any surprisingly weak data will accelerate the pair’s decline toward the 0.7000 level.
Geopolitical Risks and Trading Strategies
The potential for a 60-day US-Iran ceasefire introduces significant uncertainty, acting as a possible short-term floor for the pair. A successful deal would likely lower oil prices and boost risk sentiment, providing a temporary lift for the risk-sensitive Aussie. However, we view this as a fragile support level given the deal is not yet finalized.
Given this binary geopolitical risk, we believe traders should consider strategies that benefit from a significant price move. Implied volatility in one-month AUD/USD options has already climbed to a three-month high of 9.5%, showing the market is bracing for a breakout. Buying put options offers a clear way to position for a breakdown if the ceasefire fails and the US dollar strengthens.
A failure to secure the deal could trigger a sharp rise in energy costs, a scenario that historically disrupts markets during Middle East conflicts. This would clash with the Federal Reserve’s mandate, as recent US core PCE inflation has remained stubbornly above 2.8%. Such a shock would likely force a hawkish Fed response, pushing US Treasury yields higher and propelling the USD upward.
