Australian Dollar caught between hawkish RBA, Iran-related inflation risks

AUD/USD trades around 0.7055 on Thursday at the time of writing, little changed on the day. The pair consolidates after surpassing 0.7090 on Wednesday, caught between support for the Australian Dollar (AUD) from a Reserve Bank of Australia (RBA) that remains cautious about inflation and resilience in the US Dollar (USD) amid persistent tensions between the United States (US) and Iran.

The RBA left its key interest rate unchanged at 4.35% at its meeting on Tuesday while maintaining a hawkish bias. The central bank believes that inflation risks remain tilted to the upside and stands ready to raise interest rates again if price pressures fail to ease sufficiently. RBA Governor Michele Bullock also indicated that the Board had discussed the possibility of raising rates.

Investors remain cautious, however, about the likelihood of further monetary tightening. Markets assign a 79% chance that the RBA will leave interest rates unchanged at its September 29 meeting, compared with a 21% chance of a 25-basis-point hike, according to Prime Terminal.

In the United States, the latest Consumer Price Index (CPI) report has reduced expectations of an imminent interest rate hike by the Federal Reserve (Fed). Annual inflation slowed to 3.4% in July from 3.5% previously, while core inflation declined to 2.5% from 2.4%, as both readings were in line with expectations. Markets now assign around a 60% chance to the Fed keeping rates unchanged in September according to the CME FedWatch Tool, having previously priced in a similar chance of a hike.

The decline in Fed tightening expectations theoretically limits the US Dollar’s upside and provides additional support to AUD/USD. However, tensions between Washington and Tehran complicate the inflation outlook. Volatility in Oil prices and the risk of disruptions in the Strait of Hormuz could reignite energy price pressures and call into question the continuation of the US disinflation process.

US President Donald Trump says the United States has total control over the Strait of Hormuz, while Iran also claims control over the strategic waterway. This geopolitical uncertainty sustains demand for safe-haven assets, including the US Dollar, and caps the Australian Dollar’s recovery.

Attention turns to the US Producer Price Index (PPI), Weekly Initial Jobless Claims and remarks from several Fed officials. These developments could provide fresh clues about the Fed interest rate outlook and help AUD/USD break out of its current consolidation phase.

AUD/USD technical analysis

In the one-hour chart, AUD/USD trades at 0.7054, holding a mildly bearish near-term bias as it sits below the 100-period simple moving average (SMA) at 0.7057 and the upward-sloping trendline near 0.7064. The pair remains above the 200-period SMA at 0.7045, which hints at a broader consolidation rather than an outright downtrend, while the Relative Strength Index (RSI) around 45 reinforces a lack of strong bullish momentum after the latest pullback.

On the topside, initial resistance is seen at the 100-period SMA at 0.7057, with the former support trend line turned barrier around 0.7064 acting as the next cap if buyers attempt a rebound. On the downside, immediate support aligns at the 200-period SMA near 0.7045, followed by a horizontal floor at 0.7040; a stronger bearish extension would expose the deeper horizontal support around 0.7020.