The Australian Dollar (AUD) extended its upward trajectory for a third consecutive session on Wednesday, lifted by a convergence of factors including a Middle East ceasefire, a softer-than-expected inflation print, and a weakening US Dollar. As the AUD/USD pair climbed past key resistance levels, market focus turned toward central bank policy trajectories in both Australia and the United States, alongside evolving geopolitical developments.
Australian Dollar Surges on Ceasefire-Induced Risk Appetite
Investor sentiment brightened significantly after US President Donald Trump confirmed a ceasefire between Israel and Iran. The announcement eased global market jitters, reducing the demand for safe-haven assets such as the US Dollar and Gold, while benefitting risk-sensitive currencies like the Australian Dollar.
Although the truce raised hopes for de-escalation in the Middle East, analysts remained cautious about its longevity. The potential revival of nuclear negotiations and concerns over Iran’s stockpile of enriched uranium continued to cloud the outlook. However, for now, the ceasefire has provided the Australian Dollar a strong tailwind, prompting traders to reduce hedges and pivot into risk-friendly trades.
Softer Inflation Reinforces RBA Rate Cut Expectations
Australia’s Monthly Consumer Price Index (CPI) for May printed at 2.1% year-on-year, undershooting the consensus forecast of 2.3% and the prior reading of 2.4%. This marked a slowdown after three consecutive months of inflation hovering at 2.4%, offering a clearer signal that domestic price pressures are easing.
This downward move in inflation, when coupled with recently sluggish GDP figures, has strengthened market conviction that the Reserve Bank of Australia (RBA) will cut rates at its July policy meeting. Swaps markets are now pricing in an 80% probability of a 25-basis-point rate cut, with expectations building for up to 73 basis points of easing by year-end.
Such dovish sentiment has been reinforced by the RBA’s cautious communication. The central bank has consistently highlighted the lagged effects of prior hikes and the fragility in consumer spending. Wednesday’s CPI data provides the RBA with more leeway to stimulate the economy without stoking inflation.
Fed Cautious as Powell Pushes Back on July Cuts
While the Australian Dollar advanced, the US Dollar came under pressure amid mixed signals from Federal Reserve policymakers. During his testimony before the Congressional Budget Committee, Fed Chair Jerome Powell emphasized a need for patience, suggesting that rate cuts may not begin until the fourth quarter of 2025.
Powell acknowledged that inflation was trending in the right direction but warned that premature policy easing could backfire. His remarks contrasted with those from other Fed officials who appeared more open to rate cuts as early as July. Notably:
Michelle Bowman, Fed Vice Chair for Supervision, hinted that labor market risks may warrant a sooner-than-expected pivot.
Christopher Waller, a voting member of the FOMC, said the Fed could begin easing next month amid global uncertainty and moderating price pressures.
This divergence in views has introduced fresh volatility into the bond and forex markets. The US Dollar Index (DXY) dropped to around 97.90, reflecting a recalibration of interest rate expectations and diminished haven demand.
Australia’s PMI Data Signals Modest Recovery
Supporting the bullish AUD narrative, S&P Global’s PMI figures suggested a stabilizing economic environment in Australia:
Manufacturing PMI stayed firm at 51.0, signaling slight expansion.
Services PMI rose to 51.3 from 50.6, reflecting modest improvement in consumer-facing industries.
Composite PMI, a broader measure of overall business activity, climbed to 51.2 in June from 50.5 in May.
These figures point to a resilient economy, capable of absorbing rate cuts without slipping into contraction. The rebound in services activity is especially noteworthy, as it signals recovering domestic demand despite persistent cost-of-living pressures.
China Factor Adds to AUD Momentum
China’s economic trajectory remains a crucial factor for the Australian Dollar, given Australia’s reliance on commodity exports to the Chinese market. Although recent Chinese data has been mixed, signs of increased fiscal stimulus and targeted support for infrastructure spending have helped stabilize iron ore prices—a key Australian export.
With geopolitical risks in the Middle East easing and Chinese economic prospects looking slightly brighter, global investors appear more inclined to take on risk, thus channeling flows into commodity-linked currencies such as the AUD.
Australian Dollar Technical Outlook:
Technically, AUDUSD has broken above the 0.6700 psychological level, with the next resistance zone around 0.6765, a region last tested in April. Momentum indicators on the daily chart suggest room for further upside, particularly if the US Dollar continues to weaken and global sentiment holds firm.
Support levels are seen at 0.6650 and 0.6620, with a break below the latter potentially triggering a retest of the 50-day EMA. However, near-term risks are skewed to the upside, especially if markets begin fully pricing in an RBA rate cut and the Fed stays on hold longer.
What to Watch Next
1. RBA July Meeting
Markets will be laser-focused on whether the RBA delivers its widely expected 25 bps cut in July. Forward guidance will be critical to determining if this is a one-and-done move or the beginning of a more extended easing cycle.
2. Fed Commentary
With Powell’s testimony continuing through the week, any deviation in tone or new inflation data could quickly reshape US rate expectations.
3. Middle East Developments
Sustained peace in the Middle East could further erode demand for USD as a safe-haven, favoring continued AUD strength. Conversely, any breakdown in ceasefire talks would likely reverse the risk-on flows currently favoring the Australian Dollar.
4. China’s Industrial Data
Any fresh signs of stimulus or better-than-expected factory activity in China would enhance AUD appeal, particularly if iron ore demand rebounds.
Conclusion: AUDUSD Eyes Further Upside as Sentiment Turns
The Australian Dollar’s rally is being powered by a powerful trifecta: cooling inflation that paves the way for RBA easing, fading US Dollar strength as the Fed adopts a cautious tone, and a geopolitical reprieve that improves global risk appetite. As long as these dynamics hold, the AUD/USD pair could continue to push higher, possibly testing the upper bounds of its three-month range.
However, traders should stay alert for event risk from central bank signals, Chinese data, and any Middle East developments that could quickly flip sentiment.
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