AUD/USD stayed under pressure near 0.7035 in early Asian trade on Monday, with the Australian dollar weakening as Middle East tensions lifted demand for the US dollar. Iran launched multiple waves of missiles at northern Israel over the weekend, while US President Donald Trump said he would urge Israeli Prime Minister Benjamin Netanyahu not to retaliate, citing concerns about a three-party deal. The risk backdrop favoured the Greenback, even as broader drivers for AUD include Chinese growth, iron ore prices and Australia’s trade balance.
US data also underpinned the move. Nonfarm Payrolls rose by 172,000 in May, marking a third consecutive month of strong gains, while the prior month was revised to 179,000 from 115,000 and the unemployment rate held at 4.3%. In Australia, a hawkish Reserve Bank of Australia stance offered some counterweight after three rate increases earlier in the year took the cash rate to 4.35%, with the bank’s inflation target set at 2–3%. Iron ore remains Australia’s largest export, valued at $118 billion a year in 2021.
US Dollar Strength Amid Geopolitical and Economic Drivers
Given the current environment, we see the US Dollar strengthening against the Australian Dollar. The escalating conflict in the Middle East is driving a classic flight to safety, boosting demand for safe-haven assets like the Greenback. Historically, the US Dollar Index (DXY) has rallied during periods of heightened geopolitical risk, and we expect this pattern to continue in the coming weeks.
The US jobs report, while not a blockbuster, is solid enough to keep the Federal Reserve on hold. With 172,000 jobs added, the data supports the Fed’s view that the economy is resilient, pushing back market expectations for any near-term interest rate cuts. As of this week, Fed funds futures are pricing in less than a 45% chance of a rate cut by the September meeting, which provides a strong floor for the USD.
On the Australian side, the Reserve Bank of Australia’s hawkish stance is a key supporting factor, but it is being overshadowed. Australia’s latest quarterly CPI data showed inflation remains sticky at 3.6%, justifying the RBA’s tough talk. However, external pressures are mounting against the Aussie dollar, creating a difficult headwind.
We see significant external risks for the AUD, particularly from its largest trading partner. Recent data from China has shown manufacturing PMI figures hovering just above the 50-point mark, indicating sluggish expansion and weighing on demand for Australian commodities. This is compounded by iron ore prices, which have softened to around $105 per tonne, removing a key pillar of support for the Aussie.
Bearish Derivative Strategies for AUD/USD
For derivative traders, this suggests a bearish outlook for the AUD/USD pair. We are considering buying put options with strike prices below the 0.7000 psychological level to capitalize on potential further downside. This strategy offers a defined-risk way to position for a drop toward the 0.6900 area over the next several weeks.
To manage costs and risk, establishing bear put spreads could also be an effective strategy. By selling a lower-strike put against a purchased put, we can reduce the initial premium outlay. This approach would be prudent in case Middle East tensions de-escalate unexpectedly, which could cause a sharp reversal and a relief rally in the AUD/USD.
