Australian Dollar Eyes 1st Weekly Loss in Seven

The Australian dollar traded around $0.703 on Friday, remaining volatile and on track for its first weekly decline since mid-January, as global risk sentiment worsened amid escalating Middle East tensions. The US-Israeli conflict with Iran entered its seventh day, driving oil prices higher on supply concerns and reigniting fears of sustained inflation. Meanwhile, President Donald Trump asserted the right to influence Iran’s next leader, while the US House rejected an effort to halt his air campaign. Rising energy prices and heightened geopolitical risks have strengthened the US dollar and prompted shifts in rate expectations for major central banks. In Australia, debate over a potential March rate hike continues, as markets weigh the impact of higher energy costs and global uncertainty on inflation and growth. Markets currently assign roughly 30% chance of the RBA lifting its 3.85% cash rate at the March 17 board meeting, though a move to 4.10% in May is fully priced in.

The Australian dollar hovered around $0.706, trading in a narrow range near three-year peaks, as investors weighed the impact and duration of the ongoing Middle East conflict. Possible talks between the US and Iran raised hopes of easing tensions and resuming oil shipments through the Strait of Hormuz, although uncertainty remained. A Wednesday report said Iran’s Ministry of Intelligence signaled openness to discussions with Washington on ending the war, but a source from the ministry later denied the claims. In Australia, latest data showed household spending rebounded slightly in January after falling in December, indicating softer consumer demand. This could ease RBA concerns that demand is outpacing the economy’s supply and reduce pressure for further rate hikes. However, the widening Middle East conflict alongside stronger domestic Q4 GDP data raised concerns about inflation. Markets see only a small chance of a rate hike in March, though a move higher in May remains fully priced.

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.