Australian Dollar Falls as US Considers Military Action Against Iran

Australian Dollar Falls as US Considers Military Action Against Iran

The Australian Dollar (AUD) weakened against the US Dollar (USD) on Thursday, slipping from recent highs as a combination of domestic economic disappointment and mounting geopolitical tensions undermined investor confidence. The risk-sensitive AUD/USD pair remained under pressure after mixed labor market data from Australia and rising concerns over a potential US military strike on Iran.

Australian Dollar Sinks on Weaker-than-Expected Jobs Data

The Australian Bureau of Statistics (ABS) reported that employment in Australia unexpectedly fell by 2,500 in May, a stark contrast to April’s robust 87.6K gain (revised down from 89K) and sharply missing the market’s forecast of a 25K increase. The Unemployment Rate remained steady at 4.1%, in line with expectations, but the dip in job creation rattled markets.

The jobs report highlighted a potential softening in Australia’s labor market and reduced the likelihood of near-term monetary tightening by the Reserve Bank of Australia (RBA). Investors interpreted the numbers as a sign of underlying economic weakness, especially when paired with subdued wage growth and slowing household consumption trends.

Fed Holds Rates, Signals Uncertainty Ahead

Meanwhile, the Federal Reserve kept its benchmark interest rate unchanged at 4.5% during its June policy meeting, in line with expectations. However, the tone from Chair Jerome Powell suggested caution. He emphasized that policy uncertainty remains high, and any future rate cuts will be data-dependent, particularly on improvements in labor market and inflation figures.

The Federal Open Market Committee (FOMC) projected a total of 50 basis points of rate cuts by the end of 2025, down from previous expectations, suggesting that the Fed is in no rush to pivot toward a dovish stance unless inflation eases significantly.

US Retail Sales Surprise to Downside

Adding to the mix, US Retail Sales dropped by 0.9% in May, a deeper contraction than the expected 0.7% decline and following a downwardly revised 0.1% drop in April (initially reported as a gain). The disappointing consumer spending data raises concerns about the health of the US economy, but it also complicates the Fed’s policy outlook as inflation remains sticky.

Geopolitical Shockwaves: US-Iran Tensions Escalate

The Australian Dollar, often considered a proxy for risk sentiment, faced additional headwinds from escalating Middle East tensions. According to Bloomberg, unnamed sources confirmed that US officials are preparing for a possible military strike on Iran, with plans evolving rapidly. The Wall Street Journal later corroborated these reports, citing sources close to the White House indicating that President Trump has approved attack plans, though he is waiting to see if Tehran backs away from its nuclear ambitions.

Further inflaming tensions, Trump publicly called for Iran’s “unconditional surrender” on his social media platform. This follows a joint statement by G7 leaders earlier in the week, asserting that “Iran can never have a nuclear weapon.” The group stressed that resolving the Iranian crisis diplomatically could prevent a broader regional war and stabilize global markets.

Market Reactions: Risk Aversion Lifts the US Dollar

Investors rushed to safe-haven assets, pushing the US Dollar Index (DXY) up to 99.00, its highest level in weeks. With risk appetite deteriorating, flows into the greenback intensified, further dragging the AUD/USD pair lower.

The DXY strength was also supported by elevated US Treasury yields, as concerns over potential conflict and Fed policy uncertainty added to demand for liquid, dollar-denominated assets. Meanwhile, equities dipped, oil prices climbed, and gold edged higher, underscoring the broad risk-off tone in global markets.

China Data Shows Resilience, But Trade Uncertainty Looms

In Asia, China’s macroeconomic data offered some optimism, albeit with caveats. Retail Sales surged 6.4% YoY in May, beating expectations of 5.0% and marking an improvement from April’s 5.1% gain. This reflects a rebound in consumer spending and holiday-driven demand.

However, Industrial Production rose 5.8%, falling short of the 5.9% forecast and April’s 6.1% expansion. While the production sector continues to grow, the slower-than-expected pace suggests that external demand and factory momentum are cooling.

According to the National Bureau of Statistics (NBS), the Chinese economy remained broadly stable in the first half of 2025, but authorities acknowledged that growth in Q2 may face pressure from global trade policy uncertainties. With the US-China trade relationship still tense and supply chain adjustments ongoing, any geopolitical escalation—particularly involving the US—could further dent sentiment.

AUDUSD Outlook: Caught Between Domestic Weakness and Global Turmoil

The AUDUSD pair remains under pressure due to a combination of domestic and international factors:

• Weaker employment data in Australia signals reduced labor market momentum, which could keep the RBA on hold or even considering further easing.
• Fed policy remains cautious, but with retail sales weakening, investors are watching US data closely for confirmation of economic slowdown.
• Geopolitical tensions are adding a layer of complexity, with military risks in the Middle East prompting investors to move away from risk assets like the Australian Dollar.
• While China’s strong retail numbers offer some buffer, the broader Asian risk environment remains fragile.

Unless tensions ease or Australia posts a significant economic rebound, the AUDUSD pair may struggle to regain traction in the short term. Key support is seen near 0.6570, while resistance lies around 0.6690.

Key Data Summary

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