Australian Dollar Set for a Muted Week

The Australian dollar rose to around $0.695 but was on track to finish the week largely unchanged as investors monitored developments surrounding the Strait of Hormuz following renewed tensions in the Middle East. The safe-haven US dollar strengthened, while oil prices climbed after the US and Iran carried out military strikes in the Gulf earlier this week. However, both countries are now set to resume peace talks despite the recent escalation. Meanwhile, the International Monetary Fund lowered its 2026 growth forecast for Australia to 1.9% from 2.0% and warned inflation would remain elevated at around 4% this year. The Reserve Bank of Australia will meet in August and is expected to keep its cash rate unchanged at 4.35%, though markets still price in a roughly 60% chance of one final rate hike later this year, depending on the movement of oil prices. Traders also await key employment and inflation data due later this month, which could offer fresh clues on the policy outlook.

The Australian dollar held its recent decline to around $0.694, moving back toward three-month lows as renewed US-Iran tensions dampened global risk sentiment. Traders flocked to the safe-haven US dollar, while oil prices jumped after the US launched a fresh wave of strikes against Iran and revoked a license allowing the country to sell oil following attacks on tankers in the Strait of Hormuz, fueling concerns over renewed disruptions in energy supplies. Meanwhile, RBA Assistant Governor Sarah Hunter said recent oil price shocks had weakened consumer and business confidence but noted the Australian economy remained resilient. She also reiterated that the central bank would act as needed to return inflation to target and maintain sustainable full employment. Still, markets continued to expect the Reserve Bank to keep its cash rate unchanged in August after delivering three rate hikes this year, while the odds of another increase has eased, with a November hike now priced at around 40%.

The Australian dollar held its recent gains around $0.695, staying near a two-week high, as a decline in the US dollar combined with expectations of further RBA rate hikes. Markets continued to assess the Reserve Bank of Australia’s June meeting minutes, which underscored policymakers' strong concerns over persistent inflation, excess demand, and capacity constraints. Major banks, such as the Commonwealth Bank of Australia said the minutes highlighted enduring inflationary pressures, while ANZ warned they reinforced the risk of another rate hike in the months ahead. Meanwhile, the greenback came under pressure from easing energy prices and a softer-than-expected US payrolls report, prompting markets to scale back expectations of a near-term Federal Reserve interest rate hike, with futures pricing a 78% chance that rates will remain unchanged at the July 29 meeting. Elsewhere, US-Iran peace talks showed no progress, but shipping through the Strait of Hormuz continued to recover.