Australian Dollar Set for Muted Week

The Australian dollar fell to around $0.70, pulling back from a seven-week high and on track to finish the week largely unchanged as renewed tensions in the Middle East dampened risk sentiment. The US dollar strengthened, while oil prices climbed following reports of Iranian attacks in the Strait of Hormuz and a lack of clarity on an agreement to reopen the crucial waterway. Higher energy prices revived inflation concerns and reinforced expectations that global interest rates could remain higher for longer. In Australia, after three rate hikes this year, markets are pricing in virtually no chance of a rate increase at the Reserve Bank's monetary policy meeting next week following softer-than-expected second-quarter inflation data. Investors are also assigning little chance of a move in September, while pricing roughly a 60% probability of a rate hike in November if third-quarter inflation proves stronger than expected.

The Australian dollar held above $0.705, staying near a seven-week high, supported by improving global risk appetite and upbeat domestic trade data. Australia’s balance on goods trade unexpectedly swung to a surplus of A$ 1.9 billion in June from a revised deficit of A$ 2.4 billion in May, as exports of gold and iron rebounded sharply, while imports flattened after a strong run. Attention now turns to the Reserve Bank of Australia’s monetary policy meeting next week, where markets are pricing in virtually no chance of a rate hike after three increases this year, but a hike in November is still about 60% priced in. Elsewhere, an agreement announced by Iran and Oman to establish a shipping corridor through the Strait of Hormuz, strengthened hopes for improved energy supplies from the Middle East. The partial reopening of the key waterway weighed on the greenback, as lower oil prices eased inflation pressures and reduced expectations for more aggressive rate hikes by the Federal Reserve.

The Australian dollar held above $0.70, sitting at a seven-week high, supported by improving global risk appetite, broad US dollar weakness, and strong domestic economic data. Australia's private sector gained further momentum in July, with the composite PMI revised up to 53.2, the highest since January, led by a six-month high in services activity and a return to manufacturing growth. Stronger-than-expected household spending also reinforced signs of resilient domestic demand, although markets have priced out almost any chance of a rate hike from the Reserve Bank at its policy meeting next week. Elsewhere, optimism that a deal to reopen the Strait of Hormuz is nearing completion has eased fears of major supply disruptions, lifting Australian equities to a record high. Meanwhile, the greenback remained under pressure following recent coordinated support for the Japanese yen by US and Japanese authorities, which has spilled over into broader Asian currencies.