Australian Dollar Set to Post Weekly Gains

The Australian dollar remained below $0.70, hovering close to three-month lows as a resurgent US dollar continued to dominate currency markets, while the domestic policy outlook remained mixed. Minutes from the Reserve Bank of Australia's June policy meeting showed policymakers continued to see upside risks to inflation and remained prepared to raise interest rates again if needed, having already delivered three rate hikes this year. Despite the hawkish tone, easing oil prices since the meeting have tempered expectations for additional tightening, with markets now assigning just a 15% probability of a rate hike at the August meeting. They also see a 60% chance that the current 4.35% cash rate marks the peak of the tightening cycle, with the first rate cut not expected until late 2027. Meanwhile, the greenback remained broadly firm as strong US economic data underscored the economy’s resilience and reinforced expectations that the Federal Reserve will raise interest rates this year.

The Australian dollar fell further below $0.687, extending losses to a fresh three-month low as a stronger US dollar outweighed the RBA’s restrictive policy stance. Minutes from the Reserve Bank's June meeting showed policymakers agreed interest rates should remain restrictive to curb excess demand and bring inflation back to target even as economic growth slowed. The board also said they are prepared to raise rates further if needed as developments in the Middle East still pose upside risks to inflation. Despite the hawkish tone, the recent retreat in oil prices have led investors to pare the risk of another rate hike this year to around 40%, with markets also beginning to price in rate cuts as early as mid-2027. Meanwhile, the Aussie remained under pressure from a firmer US dollar after the Fed Reserve adopted a more hawkish stance, prompting markets to price in a rate hike as early as September. The AUD is now headed for an over 4% loss for the month and a 0.5% fall for the quarter.

The Australian dollar depreciated further below $0.690, hitting a fresh three-month low as renewed tensions in the Middle East weighed on risk sentiment. The US and Iran agreed to pause hostilities and resume peace talks over the Strait of Hormuz dispute after days of strikes and counterstrikes on vessels in the Gulf last week. Oil prices climbed, reigniting inflation concerns, while the safe-haven US dollar remained firm, with expectations of interest rate hikes by the Federal Reserve adding to its strength. Meanwhile, the Reserve Bank of Australia on Monday outlined the tools it could deploy during future economic or financial crises, highlighting bond purchases, forward guidance, and liquidity measures should borrowing costs return to very low levels. Attention now turns on Tuesday's release of minutes from the central bank's most recent interest-rate setting meeting. The RBA left the cash rate unchanged at 4.35% at its June meeting following three rate hikes earlier this year.