Aussie Dollar Flat to Start the Week

The Australian dollar traded flat at $0.71 on Monday, sitting near a two-week high as markets awaited developments from Middle East peace talks and a slate of key domestic data releases later in the week. Key releases, including the April trade balance, Q1 current account, and GDP figures, are expected to offer insight into the economy’s underlying momentum and help shape expectations for the Reserve Bank's policy outlook. The central bank has already hiked rates three times this year, and recent misses on employment and inflation have led investors to sharply scale back bets of another June rate increase, now priced at just around a 5% probability. Markets still price in 70% chance of one final move to 4.6% in the last quarter of the year. Meanwhile, global oil prices continued to rise and the safe haven US dollar strengthened, as a US-Iran ceasefire deal remains elusive, tensions in the Middle East stay elevated, and efforts to reopen the Strait of Hormuz have shown little progress.

The Australian dollar traded around $0.71, on track for a roughly 0.5% monthly decline, as markets sharply reduced expectations for further rate hikes amid signs that earlier monetary tightening is beginning to filter through the economy. This comes after a softer-than-expected April inflation print and weaker consumer spending data earlier this week, as well as recent signs of cooling in the labor market, prompted investors to sharply cut the odds of a June rate hike to just 5%. Markets still price in a 70% odds of one final move to 4.6% in the last quarter of the year. Focus now turns to a raft of economic data next week, including the final manufacturing PMI survey, trade balance, and key GDP figures, which will provide further clues on the economy’s health. Despite the monthly decline, the Aussie is headed for a modest weekly gain, as reports of a preliminary deal between the US and Iran, including the potential reopening of the vital Strait of Hormuz, lifted global risk sentiment.

The Australian dollar fell to around $0.71, hitting a six-week low as weak household demand reinforced expectations that policy tightening is nearing its end. Data showed household spending fell a sharper-than-expected 1.1% in April as consumers cut back on travel, clothing, and food, with higher fuel costs and geopolitical uncertainty weighing on confidence. The decline added to signs that restrictive monetary policy is cooling demand, even as business investment surged 6.5% in Q1, driven largely by imported data equipment. Markets now widely expect the Reserve Bank to hold rates at 4.35% in June, while the odds of an August hike has more than halved to 40%. Earlier inflation data also supported the shift in sentiment, with headline CPI easing to 0.4% in April and annual inflation slowing to 4.2%, helped partly by fuel tax relief. However, underlying inflation remained elevated at 3.4%, still above the RBA’s target range, reflecting ongoing spillovers from higher global energy costs.