Aussie Holds Firm Despite Soft GDP Data

The Australian dollar held above $0.71, trading near three-week highs as markets weighed the country’s latest GDP figures. The economy grew by just 0.3% in Q1, below expectations of 0.5% and down from 0.9% previously, while annual growth of 2.5% also missed forecasts. The softer growth readings reinforced signs that higher interest rates are cooling demand, and a key data point policymakers are likely to assess ahead of the Reserve Bank’s June 15–16 meeting to determine whether current settings are sufficiently restrictive to bring inflation back to target. The central bank has already hiked rates three times this year in its effort to contain price pressures. This comes against a backdrop of geopolitical tensions linked to the US–Iran conflict, which have pushed up global energy costs and added to external inflation risks. Markets have largely ruled out another rate hike this month, but remain evenly split for a move in August and are nearly fully pricing a 4.60% peak by year-end.

The Australian dollar hovered around $0.71, trading in a sideways range 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.