Australian Dollar Set to Post Weekly Gains

The Australian dollar weakened to around $0.700 on Wednesday, hitting a four-week low, as escalating geopolitical risks outweighed better-than-expected domestic GDP figures. Data showed the economy expanded 0.8% in Q4 2025, while annual growth hit 2.6%, topping estimates and marking the fastest pace in almost three years. While the report confirms solid economic momentum, it failed to firmly justify a follow up rate hike later this month. Market pricing currently implies just around a 30% chance of a March hike, while a quarter-point increase to 4.10% remains fully priced for May. The expanding conflict in the Middle East, which has rattled markets globally, overshadowed the strong GDP numbers and weighed on the risk-sensitive Aussie. Markets are closely monitoring the potential impact of these tensions on growth and inflation. On Tuesday, Governor Michele Bullock said the central bank remains “very alert” to such risks and ready to respond with tighter monetary policy if needed.

The Australian dollar rose to around $0.71 on Tuesday, trimming some losses from the previous session as markets increasingly priced in a potential Reserve Bank of Australia cash rate hike. RBA Governor Michele Bullock signaled that the central bank’s March policy meeting would be “live” for a possible rate increase, marking a shift from her recent emphasis on patience. She also warned that an oil price shock stemming from tensions involving Iran could reignite domestic inflationary pressures, noting that recent clashes between Iran and the US underscore how quickly global conditions can change. Market pricing now suggests around a 28% chance of a 25 bps rate hike, while fully pricing in tightening through May. Markets also see roughly a 75% chance of another increase to 4.35% by the end of the year. The Aussie also drew support from an atypical haven demand, with its energy wealth helping to counter rising oil costs.

The Australian dollar slipped to around $0.70 on Monday, erasing last week’s gains as investors sought safe-haven assets like the greenback amid escalating conflict in the Middle East. The US and Israel carried out coordinated strikes on Iran over the weekend, resulting in the death of Iran’s Supreme Leader, Ayatollah Ali Khamenei. Iran responded with retaliatory attacks targeting US assets in neighboring countries, rattling global financial markets. Heightened geopolitical uncertainty weighed on risk-sensitive currencies, including the Aussie, which is often seen as a proxy for global growth and commodity demand. Domestically, the manufacturing PMI was revised down to 51 in February 2026 from a preliminary reading of 51.5, marking the lowest level in four months and easing from 52.3 in the previous month. Meanwhile, the Melbourne Institute’s Monthly Inflation Gauge fell 0.2% month-on-month in February, reversing a 0.2% rise in January and marking the first decline since last August.