The Australian Dollar (AUD) continues to face downside pressure, dragged by the persistent risk-off sentiment driven by heightened geopolitical tensions in the Middle East, specifically between Israel and Iran. 

Although the US Dollar (USD) is also struggling under the weight of softer inflation data and Federal Reserve rate cut bets, the AUD remains on the back foot, revealing deeper vulnerabilities in global and domestic sentiment. This article from Aurudium offers a detailed analysis and expert perspective on the topic.

Geopolitical Escalation Fuels Risk Aversion

The broader financial markets have adopted a cautious tone, with investors shifting away from risk-sensitive assets such as the AUD. The increasing likelihood of a military confrontation between Israel and Iran, especially following reports that Israel is prepared to launch operations into Iran, has rattled investor confidence. 

The United States has advised its citizens to leave parts of the Middle East, intensifying fears of a broader regional conflict.

Adding to the geopolitical unease, the US President made strong statements on Wednesday, asserting that the US will not allow Iran to obtain nuclear weapons. These developments have catalyzed a risk-off environment, traditionally unfavorable for the AUD due to its commodity-linked and China-sensitive nature.

Australian Inflation Expectations Climb

Despite geopolitical risks, domestic economic data from Australia offered a mixed backdrop. The Consumer Inflation Expectations for June rose sharply to 5.0%, up from 4.1% in May. This unexpected increase suggests that price pressures remain a concern for Australian consumers, possibly complicating the Reserve Bank of Australia’s (RBA) policy trajectory.

However, this higher inflation outlook failed to support the AUD, highlighting that external risk factors are currently overshadowing domestic fundamentals. Australia’s recent Trade Balance also showed signs of strain, with a surplus of AUD 5.41 billion, missing both the AUD 6.1 billion consensus and revised AUD 6.89 billion prior figure. Exports fell by 2.4% month-over-month, reinforcing concerns about Australia’s external demand environment, especially from China.

US Dollar Pressured by Softer CPI and Fed Rate Cut Bets

While the AUD weakens, the US Dollar Index (DXY) is also trending lower, trading around 98.30, extending losses for the second day. The May US Consumer Price Index (CPI) came in softer-than-expected, with headline inflation rising 2.4% YoY versus the 2.5% forecast, and core inflation rising 2.8% YoY, just under expectations.

This cooling in US inflation has significantly boosted market expectations of a Federal Reserve rate cut as early as September. As such, Treasury yields have slipped, and USD bulls are losing momentum. Despite this, the AUD remains pressured, suggesting that while the Greenback is losing ground, the Australian Dollar is losing ground faster due to the broader macro and geopolitical landscape.

China’s Economic and Trade Dynamics Weigh on AUD

The AUD/USD pair is inherently sensitive to China’s economic health, given the strong trade linkage between Australia and China. China’s Trade Balance in May printed a surplus of CNY743.56 billion, up from CNY689.99 billion, though export growth moderated to 6.3% YoY from 9.3%, and imports contracted 2.1% YoY, reflecting weakening domestic and global demand.

Moreover, China’s decision to issue only six-month rare-earth export licenses to US companies, as reported by the Wall Street Journal, signals a shift toward resource nationalism, increasing uncertainty in global trade. Any escalation in US-China trade friction could directly or indirectly impact the AUD, given Australia’s critical position in global commodity supply chains.

US Trade Talk Statements Stir Confusion

Adding another layer of uncertainty, the US President stated on Truth Social that a new trade deal with China has been finalized, pending approval by him and President Xi Jinping. He claimed a tariff advantage of 55% to 10% in favor of the US, which could potentially impact global trade balances. 

Although details remain unclear, any reconfiguration in US-China trade terms could disrupt Australia’s export trajectory, particularly in iron ore and energy exports.

Technical Outlook: AUD/USD Vulnerable Below 0.6500

From a technical perspective, the AUD/USD pair is testing the critical 0.6500 support level. The pair is trading just above the nine-day Exponential Moving Average (EMA) around 0.6492. A decisive break below this could intensify bearish momentum, exposing the 50-day EMA at 0.6419 as the next support.

However, the 14-day Relative Strength Index (RSI) remains marginally above 50, indicating that a modest bullish bias still exists. If sentiment stabilizes and US rate cut bets strengthen, the AUD could target resistance at 0.6538, a seven-month high reached earlier in June. 

Further advances may open up the path toward 0.6687, and the ascending channel’s upper boundary around 0.6720.

Conclusion: Sentiment-Driven AUD Faces Complex Headwinds

The Australian Dollar’s weakness is not just a reflection of the US Dollar’s strength or lack thereof; it’s a barometer of global risk appetite. While dovish Fed expectations typically support the AUD, escalating Middle East tensions, softening trade balances, and China-linked uncertainties are more influential right now.

The AUD may recover if risk sentiment stabilizes and US interest rate cut expectations intensify. However, as long as geopolitical instability, China trade concerns, and domestic trade softness persist, the AUD/USD pair is likely to remain capped, with downside risks prevailing in the short term.