The Australian dollar slipped about 0.25% against the US dollar as risk appetite cooled after Donald Trump threatened retaliation against Iran following a helicopter being downed in the Strait of Hormuz. AUD/USD traded around 0.7027 after touching a six-week low of 0.7005. Oil recouped some ground but still closed lower, with WTI down almost 3%, and the US Dollar Index (DXY) ended close to flat. Attention is now on the US Consumer Price Index (CPI) for May, due Wednesday, for clues on inflation pressures linked to the conflict.
US data showed the NFIB small business optimism index fell to 95.3, below its 52-year average of 98.0, while 34% of firms said they plan to raise prices over the next three months. A Reuters poll found almost 70% of 102 economists expect the Fed funds rate to finish the year in a 3.50%–3.75% range, even as markets price 22 basis points of hikes, and some FOMC members have flagged the possibility of higher rates. In Australia, consumer sentiment fell again in June and NAB said it no longer expects a 25 bp RBA hike in August, pencilling the cash rate peak at 4.35% after three increases this year. Technically, AUD/USD sat near 0.7024 below the 50-, 100- and 200-day SMAs around 0.7132, with RSI (14) near 36 and rising supports traced from 0.6833 and 0.6897.
Market Mood and Policy Divergence Impacting the Australian Dollar
We are seeing a sour market mood driving investors toward safer assets like the US dollar. Heightened trade friction between the US and China is making markets nervous, directly impacting risk-sensitive currencies. The Australian Dollar has weakened against the Greenback as a result, now trading around 0.6550.
In the United States, persistent inflation is the main story, with the latest Consumer Price Index for May showing a 3.1% annual increase, proving stickier than hoped. While the job market is cooling slightly, with job openings falling to 8.1 million, it remains strong enough to keep the Federal Reserve cautious. This is why we see money markets pricing in a very low probability of rate cuts this year, with some officials even suggesting another hike might be necessary.
The situation in Australia is quite different, where recent data showed consumer sentiment has dipped and retail sales growth has stalled. The economic headwinds from China are a major factor, leading the Reserve Bank of Australia to signal a pause in its rate-hiking cycle. We now believe the RBA will hold its cash rate steady at 4.35% through the August meeting, removing a key pillar of support for the Aussie dollar.
Positioning for Further Downside in AUD/USD Amid Heightened Volatility
Given this divergence between a hawkish Fed and a pausing RBA, we are looking at strategies that benefit from a falling AUD/USD. Buying put options on the Australian dollar offers a clear way to position for further downside in the coming weeks. This provides a defined-risk way to profit if the pair breaks below key support levels, such as the 0.6500 psychological barrier.
The current geopolitical uncertainty also suggests we should expect higher volatility across the board, not just in currencies. We can use options to trade this outlook, as long option positions benefit from sharp price swings in either direction. Historical periods of trade tension, such as in 2018-2019, show that volatility indices like the VIX can spike suddenly on unexpected news.
