Australian Dollar Outlook: AUD/USD Bullish Bets Face Geopolitical Test

Markets and risk appetite are likely to remain on edge following a major weekend escalation in the Middle East. The U.S. and Israel launched coordinated strikes against Iran, reportedly killing its Supreme Leader and several senior officials — a development that materially raises uncertainty around regional stability, oil markets and broader risk sentiment. Investors will be closely monitoring potential disruptions to energy supply, shipping routes and the risk of further retaliation as the situation remains fluid.

View related analysis:

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With questions still swirling around Iran’s leadership succession, the scope for additional military action and possible spill-over effects, FX markets — particularly AUD/USD — could see volatile price action at the open as risk assets and commodity-linked currencies adjust to fresh headlines.

That said, if Bitcoin has acted as the weekend’s real-time proxy for risk sentiment, price action initially pointed to a more constructive interpretation following its rally. Rather than outright panic, BTC’s advance suggested traders were tentatively pricing in containment rather than immediate escalation. However, that narrative may be tested if military operations continue or broaden in the days ahead.

Australian Dollar Performance

It has been a solid start to the year for the Australian dollar. However, with multiple AUD crosses flashing potential reversal signals ahead of what could be a risk-off week, bulls have been warned.

• AUD/USD handed back most of the week’s gains on Friday, forming a bearish inside week.
• AUD/JPY printed a small bearish inside week, suggesting its strong rally is beginning to lose momentum.
• AUD/NZD stalled around 1.19 and formed a small bearish outside week (hammer).
• AUD/CAD formed a bearish engulfing week.
• GBP/AUD snapped a nine-week losing streak with a bullish inside week.
• EUR/AUD ended a ten-week losing streak, hinting at a potential swing low.

Source: LSEG

Australia This Week: Economic Data and Events for AUD/USD Traders

RBA Governor Bullock in Focus at AFR Business Summit

All eyes turn to Governor Michele Bullock’s speech at the AFR Business Summit on Tuesday, with traders alert for any shift in tone on policy. Sticky inflation and a resilient labour market have seen markets fully price in two rate hikes by September.

Expect a measured message: inflation remains above target, the Board is data-dependent, and policy will stay restrictive until there is clear evidence that inflation is returning sustainably to target. Given the backdrop, it seems unlikely she will meaningfully challenge current market pricing.

Australian PMIs and GDP: Strong Data Could Accelerate RBA Hike Timing

Final PMIs are due, although I doubt we’ll see surprises. While services PMI dipped slightly in the preliminary read, S&P Global’s surveys continue to indicate that Australia’s economy remains in expansion. That likely sets the tone for Wednesday’s GDP report.

I’m not expecting downside shocks. The greater risk for policymakers is that growth prints hot, adding pressure to bring forward the next hike.

RBA cash rate futures have fully priced in another 25bp hike by August and imply around an 88% chance of a move by June. The odds of a March hike remain low at 9%, rising to 70% by May. Incoming data will determine whether the RBA moves in March or May, should the economy continue to surprise on the upside.

US Data Deluge Ahead of Nonfarm Payrolls

The US calendar is packed, with flash PMIs from S&P Global, ISM manufacturing and services reports, ADP employment and retail sales all building towards Friday’s nonfarm payrolls release.

However, unless we see a material deterioration in the US economy, these releases are unlikely to be the dominant driver of US dollar sentiment — particularly with US–Iran tensions overshadowing macro themes.

Fed funds futures imply just a % chance of a July cut. Even that may prove optimistic for the doves, with some questioning whether there is genuine appetite for the Fed to ease at all this year.

AUD/USD Futures Positioning | COT Report

• Large speculators are now at their most bullish level on AUD futures since October 2017.
• Net-long exposure has risen for five consecutive weeks after flipping from net-short.
• Asset managers switched to net-long exposure two weeks ago and now sit at their most bullish level since October 2020. Positioning is supportive — but also increasingly stretched.

Source: CFTC, CME, LSEG

AUD/USD Correlations

• The Australian dollar has largely tracked local markets in recent sessions, showing strong correlations with the ASX 200 and the New Zealand dollar.
• Its 20-day correlation with the US Dollar Index is effectively zero, with only a modest 10-day inverse correlation of -0.6. In other words, AUD/USD has not been trading as a classic USD proxy.
• That dynamic could shift quickly if geopolitical risk intensifies. Whether traditional correlations reassert themselves may depend less on data — and more on headlines.

Source: LSEG

AUD/USD Technical Analysis: Australian Dollar vs US Dollar

Last week’s bull flag breakout proved short-lived, and the potential reversal I previously warned about is beginning to take shape. The small bearish week has snapped a six-week winning streak for AUD/USD.

Implied volatility (lower left chart) is rising — although it has eased slightly from recent highs. Notably, risk reversals are pointing sharply lower while AUD/USD prices remain elevated.

In particular, the 1-week 10-delta risk reversal has fallen to its most negative level since October, signalling that downside tail risk has increased as demand for puts rises relative to calls.

A break below 0.70 is now on the radar, bringing 0.69 into focus for bears. A sustained move beneath that level would likely signal a broader bout of risk-off sentiment for the Australian dollar — and risk assets more broadly.

Source: ICE, TradingView

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-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge