Forex News
- Silver surges despite rate-hike headwinds as escalating geopolitical tensions potentially drive institutional capital into safe-haven assets.
- The white metal’s upside may be limited as Middle East tensions and rising oil prices fuel inflation and rate-hike fears.
- Fed Chair Warsh and other officials repeatedly stressed that inflation remains a central bank concern, signaling continued policy caution.
Silver price (XAG/USD) gains ground for the fourth successive day, trading around $59.70 per troy ounce during the Asian hours on Wednesday. Silver prices are surging despite rising rate-hike expectations, as powerful market forces outweigh the drag of higher interest rates. Amid escalating geopolitical tensions, institutional investors are possibly fleeing equities and channeling capital into tangible safe-haven assets like Silver.
However, the potential upside for the non-yielding metal may be limited, as escalating Middle East tensions and rising oil prices fuel inflation fears and keep interest rate expectations elevated. US President Donald Trump downplayed the likelihood of immediate negotiations with Tehran following mutual military strikes and threats from Iran-backed Houthi militants to disrupt Red Sea shipping routes. On Tuesday, Trump pledged to respond if the group interfered with the waterway, though he did not outline specific action.
In response, Iran's top military command stated via the Xinhua news agency that Tehran will expand its strikes to target US and allied assets across the region if the US attacks Iranian nuclear facilities.
On the monetary policy front, Fed Chair Warsh has repeatedly stressed that inflation remains a key concern for the central bank. This cautious stance has been echoed by several other Fed officials in recent weeks as they navigate ongoing economic pressures.
Policymakers have now entered their customary blackout period ahead of next week's FOMC meeting, where the central bank is widely expected to leave the federal funds rate unchanged. Despite this anticipated pause, expectations for tighter policy remain elevated beyond July. In fact, the CME FedWatch Tool indicates that markets are currently pricing in over 71% odds of at least a 25 basis-point rate hike at the upcoming September meeting.
Silver FAQs
Silver is a precious metal highly traded among investors. It has been historically used as a store of value and a medium of exchange. Although less popular than Gold, traders may turn to Silver to diversify their investment portfolio, for its intrinsic value or as a potential hedge during high-inflation periods. Investors can buy physical Silver, in coins or in bars, or trade it through vehicles such as Exchange Traded Funds, which track its price on international markets.
Silver prices can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can make Silver price escalate due to its safe-haven status, although to a lesser extent than Gold's. As a yieldless asset, Silver tends to rise with lower interest rates. Its moves also depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAG/USD). A strong Dollar tends to keep the price of Silver at bay, whereas a weaker Dollar is likely to propel prices up. Other factors such as investment demand, mining supply – Silver is much more abundant than Gold – and recycling rates can also affect prices.
Silver is widely used in industry, particularly in sectors such as electronics or solar energy, as it has one of the highest electric conductivity of all metals – more than Copper and Gold. A surge in demand can increase prices, while a decline tends to lower them. Dynamics in the US, Chinese and Indian economies can also contribute to price swings: for the US and particularly China, their big industrial sectors use Silver in various processes; in India, consumers’ demand for the precious metal for jewellery also plays a key role in setting prices.
Silver prices tend to follow Gold's moves. When Gold prices rise, Silver typically follows suit, as their status as safe-haven assets is similar. The Gold/Silver ratio, which shows the number of ounces of Silver needed to equal the value of one ounce of Gold, may help to determine the relative valuation between both metals. Some investors may consider a high ratio as an indicator that Silver is undervalued, or Gold is overvalued. On the contrary, a low ratio might suggest that Gold is undervalued relative to Silver.
In Wednesday’s Asian session, the US Secretary of State Marco Rubio told Southeast Asian foreign ministers that Iranian control of the Strait of Hormuz, a vital passage to almost 20% of global energy supply, would set a dangerous precedent with repercussions beyond the Middle East.
“If we create a precedent in the Middle East where a nation-state can decide to control an international waterway, charge a toll, and blow up your ships if you don’t pay, we have created a very dangerous precedent that will repeat itself in other parts of the world, including this region,” US Secretary of State Rubio said.
Market reaction
No immediate impact seen in the US Dollar (USD) following remarks from US Secretary of State Rubio. At press time, the US Dollar Index (DXY) trades marginally lower at around 101.15.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
- US Dollar Index softens to around 101.15 in Wednesday’s Asian session.
- Market expectations point to unchanged Fed policy next week, with Fed funds futures pricing in nearly a 74.9% chance.
- Houthi rebels threatened to open a front in the widening Middle East conflict.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 101.15 in the Asian trading hours on Wednesday. The DXY declines amid US Federal Reserve (Fed) rate uncertainty. Traders continue to weigh escalations in the US-Iran war, which could shape monetary policy trajectories.
Softer US inflation data might lower the possibility of a US rate hike later this year, weighing on the US Dollar against its rivals. Markets continue to anticipate no change to rates at the Fed's next meeting on July 29, with Fed funds futures pricing an implied 74.9% chance of a hold, compared to a 61.5% odds a month ago, according to the CME FedWatch tool.
On the other hand, escalating conflict between the US and Iran could boost the DXY as a safe-haven asset. The US military has launched an 11th consecutive night of strikes against Iran, with explosions reported in northwestern Iran’s Tabriz region.
Additionally, Yemen’s Houthis threaten to close Bab el-Mandeb, raising fears of wider conflict, further disrupting global oil supplies and international trade. Bab el-Mandeb is a vital shipping chokepoint, connecting the Red Sea to the Gulf of Arabia.
"A continuation of the Middle East conflict should support the dollar because of its safe-haven status and typically positive correlation with oil prices," said Commonwealth Bank of Australia currency strategist Samara Hammoud.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
US President Donald Trump approved a landmark agreement with Saudi Arabia that could potentially provide the kingdom with uranium enrichment capability for its civilian nuclear program, the Wall Street Journal reported on Wednesday.
Citing US officials, the source said the deal, which would last 30 years, is estimated to be worth tens of billions of dollars. The deal is expected to involve US firms in developing the program and could allow for the building of a uranium enrichment facility in Saudi Arabia following a joint US-Saudi study.
Market reaction
At the time of writing, the West Texas Intermediate (WTI) is up 0.70% on the day at $84.80.
WTI Oil FAQs
WTI Oil is a type of Crude Oil sold on international markets. The WTI stands for West Texas Intermediate, one of three major types including Brent and Dubai Crude. WTI is also referred to as “light” and “sweet” because of its relatively low gravity and sulfur content respectively. It is considered a high quality Oil that is easily refined. It is sourced in the United States and distributed via the Cushing hub, which is considered “The Pipeline Crossroads of the World”. It is a benchmark for the Oil market and WTI price is frequently quoted in the media.
Like all assets, supply and demand are the key drivers of WTI Oil price. As such, global growth can be a driver of increased demand and vice versa for weak global growth. Political instability, wars, and sanctions can disrupt supply and impact prices. The decisions of OPEC, a group of major Oil-producing countries, is another key driver of price. The value of the US Dollar influences the price of WTI Crude Oil, since Oil is predominantly traded in US Dollars, thus a weaker US Dollar can make Oil more affordable and vice versa.
The weekly Oil inventory reports published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) impact the price of WTI Oil. Changes in inventories reflect fluctuating supply and demand. If the data shows a drop in inventories it can indicate increased demand, pushing up Oil price. Higher inventories can reflect increased supply, pushing down prices. API’s report is published every Tuesday and EIA’s the day after. Their results are usually similar, falling within 1% of each other 75% of the time. The EIA data is considered more reliable, since it is a government agency.
OPEC (Organization of the Petroleum Exporting Countries) is a group of 12 Oil-producing nations who collectively decide production quotas for member countries at twice-yearly meetings. Their decisions often impact WTI Oil prices. When OPEC decides to lower quotas, it can tighten supply, pushing up Oil prices. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten extra non-OPEC members, the most notable of which is Russia.
Yemen’s Houthis said that they have closed the Bab el-Mandeb Strait to Saudi-linked shipping in retaliation for the kingdom’s blockade on Yemen and a recent attack on the international airport in Yemen’s rebel-held capital, Sanaa, the Guardian reported on Wednesday. The claim is to have forced six ships to reroute on Tuesday, but there was no independent confirmation.
A declared blockade of Saudi Arabia by Yemen’s Houthi rebels has the potential to widen the Iran war and further disrupt global oil supplies and international trade. Bab el-Mandeb is a vital shipping chokepoint, connecting the Red Sea to the Gulf of Arabia. Around 12% of the world’s trade passes through the narrows.
On Tuesday, a handful of oil tankers appeared to pause their journeys as they approached Yemeni waters heading into the Red Sea. The Iran-backed group sent an email to shipowners warning against calling at Saudi Arabia’s ports.
US President Donald Trump on Tuesday vowed to respond if Houthi militants in Yemen disrupted that waterway but didn’t specify how.
Market reaction
At the time of writing, the West Texas Intermediate (WTI) is up 0.58% on the day at $84.75.
WTI Oil FAQs
WTI Oil is a type of Crude Oil sold on international markets. The WTI stands for West Texas Intermediate, one of three major types including Brent and Dubai Crude. WTI is also referred to as “light” and “sweet” because of its relatively low gravity and sulfur content respectively. It is considered a high quality Oil that is easily refined. It is sourced in the United States and distributed via the Cushing hub, which is considered “The Pipeline Crossroads of the World”. It is a benchmark for the Oil market and WTI price is frequently quoted in the media.
Like all assets, supply and demand are the key drivers of WTI Oil price. As such, global growth can be a driver of increased demand and vice versa for weak global growth. Political instability, wars, and sanctions can disrupt supply and impact prices. The decisions of OPEC, a group of major Oil-producing countries, is another key driver of price. The value of the US Dollar influences the price of WTI Crude Oil, since Oil is predominantly traded in US Dollars, thus a weaker US Dollar can make Oil more affordable and vice versa.
The weekly Oil inventory reports published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) impact the price of WTI Oil. Changes in inventories reflect fluctuating supply and demand. If the data shows a drop in inventories it can indicate increased demand, pushing up Oil price. Higher inventories can reflect increased supply, pushing down prices. API’s report is published every Tuesday and EIA’s the day after. Their results are usually similar, falling within 1% of each other 75% of the time. The EIA data is considered more reliable, since it is a government agency.
OPEC (Organization of the Petroleum Exporting Countries) is a group of 12 Oil-producing nations who collectively decide production quotas for member countries at twice-yearly meetings. Their decisions often impact WTI Oil prices. When OPEC decides to lower quotas, it can tighten supply, pushing up Oil prices. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten extra non-OPEC members, the most notable of which is Russia.
The United States Central Command (CENTCOM) said that it completed another night of attacks that targeted “military operations centers, maritime capabilities, aircraft hangars, drone storage facilities, and military logistics infrastructure to further degrade Iran’s ability to threaten commercial shipping in the Strait of Hormuz,” Reuters reported on Wednesday.
“Over the past three months, Iran has attacked more than 30 commercial vessels transiting the international waterway vital for regional and global trade,” according to a statement from CENTCOM. “The unwarranted attacks have endangered hundreds of innocent mariners and undermined freedom of navigation,” the US military added.
CENTCOM insists that the critical waterway remains open to commercial shipping despite these attacks, touting the number of vessels and barrels of oil that have transited the Strait of Hormuz since early May.
Market reaction
Crude oil prices attract some buyers from these headlines. At the time of writing, the West Texas Intermediate (WTI) is up 1.10% on the day at $85.13.
WTI Oil FAQs
WTI Oil is a type of Crude Oil sold on international markets. The WTI stands for West Texas Intermediate, one of three major types including Brent and Dubai Crude. WTI is also referred to as “light” and “sweet” because of its relatively low gravity and sulfur content respectively. It is considered a high quality Oil that is easily refined. It is sourced in the United States and distributed via the Cushing hub, which is considered “The Pipeline Crossroads of the World”. It is a benchmark for the Oil market and WTI price is frequently quoted in the media.
Like all assets, supply and demand are the key drivers of WTI Oil price. As such, global growth can be a driver of increased demand and vice versa for weak global growth. Political instability, wars, and sanctions can disrupt supply and impact prices. The decisions of OPEC, a group of major Oil-producing countries, is another key driver of price. The value of the US Dollar influences the price of WTI Crude Oil, since Oil is predominantly traded in US Dollars, thus a weaker US Dollar can make Oil more affordable and vice versa.
The weekly Oil inventory reports published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) impact the price of WTI Oil. Changes in inventories reflect fluctuating supply and demand. If the data shows a drop in inventories it can indicate increased demand, pushing up Oil price. Higher inventories can reflect increased supply, pushing down prices. API’s report is published every Tuesday and EIA’s the day after. Their results are usually similar, falling within 1% of each other 75% of the time. The EIA data is considered more reliable, since it is a government agency.
OPEC (Organization of the Petroleum Exporting Countries) is a group of 12 Oil-producing nations who collectively decide production quotas for member countries at twice-yearly meetings. Their decisions often impact WTI Oil prices. When OPEC decides to lower quotas, it can tighten supply, pushing up Oil prices. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten extra non-OPEC members, the most notable of which is Russia.
- USD/CAD edges lower during the Asian session, though the downside remains limited.
- Bullish oil prices underpin the Loonie and cap spot prices amid subdued USD demand.
- The divergent Fed-BoC policy bets back the case for the emergence of some dip-buying.
The USD/CAD pair struggles to capitalize on its strong weekly gains registered over the past two days and edges lower during the Asian session on Wednesday. Spot prices currently trade around the 1.4100 round figure, though the fundamental backdrop warrants caution for aggressive bearish traders.
Crude Oil prices climb to a fresh high since June 16 amid escalating US-Iran military conflicts, the closure of the Strait of Hormuz and Houthi threats of a naval blockade on Saudi Arabia. This, in turn, is seen lending some support to the commodity-linked Loonie. The US Dollar (USD), on the other hand, pauses for a breather following a four-day move higher and turns out to be another factor acting as a headwind for the USD/CAD pair.
Meanwhile, the ongoing fighting in the Middle East, along with fresh trade war fears, might continue to underpin the safe-haven Greenback. In fact, US President Donald Trump announced a new tariff plan on imported generic drugs, with duties set to rise sharply to 100% from 2028 and then increase further to 200% the next year. This follows a new tariff of 50% on most Canadian products, which should cap the upside for the Canadian Dollar (CAD).
Furthermore, hawkish US Federal Reserve (Fed) expectations, bolstered by concerns about energy-driven inflation, favor the USD bulls. In contrast, this week's soft Canadian consumer inflation figures reaffirmed bets that the Bank of Canada (BoC) will keep rates unchanged through the remainder of 2026. This, in turn, suggests that the path of least resistance for the USD/CAD pair is to the downside and backs the case for the emergence of dip-buyers.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
- NZD/USD loses ground as risk aversion increases following Trump’s warning of retaliatory strikes against Houthis.
- A Kuwaiti tanker attack highlights the ongoing vulnerability of shipping lanes in the Persian Gulf.
- Higher-than-expected inflation could boost the New Zealand Dollar, reinforcing market expectations of an RBNZ interest rate hike in September.
NZD/USD depreciates after opening at a bullish gap, remaining in the positive territory and trading around 0.5830 during the Asian hours on Wednesday. The pair loses ground as the US Dollar (USD) pares its daily losses due to growing risk aversion tied to escalating geopolitical tensions between the United States and Iran.
US President Donald Trump downplayed the likelihood of immediate negotiations with Tehran following mutual military strikes and threats from Iran-backed Houthi militants to disrupt Red Sea shipping routes. On Tuesday, Trump pledged to respond if the group interfered with the waterway, though he did not outline specific action.
In response, Iran's top military command stated via the Xinhua news agency that Tehran will expand its strikes to target US and allied assets across the region if the US attacks Iranian nuclear facilities.
The NZD/USD pair could lose ground as the New Zealand Dollar (NZD) strengthens following higher-than-expected inflation data released on Tuesday. The hot inflation figures have reinforced market expectations that the Reserve Bank of New Zealand (RBNZ) will deliver another interest rate hike in September.
New Zealand’s annual inflation accelerated to 4.1% in the second quarter, rising from 3.1% in the previous quarter. This exceeded both market expectations of 4.0% and the central bank's own projection of 3.9%. Marking its highest level since Q4 2023, the inflation rate now stands comfortably above the RBNZ's official 1–3% target range.
Earlier this month, RBNZ Chief Economist Paul Conway warned that inflation in New Zealand may not cool down as quickly as originally forecasted. His comments raised the likelihood of additional policy tightening following the central bank's rate hike on July 8, which was its first rate increase in three years.
New Zealand Dollar FAQs
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.
Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.
The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
- AUD/USD gains momentum to around 0.7010 in Wednesday’s early Asian session.
- Rising oil prices could cement a fourth RBA rate rise this year if US-Iran conflicts are not resolved within weeks.
- The US has launched the 11th night of Iran strikes as diplomacy falters.
The AUD/USD pair gathers strength to near 0.7010 during the early Asian trading hours on Wednesday. The Australian Dollar (AUD) strengthens against the US Dollar (USD) as the likelihood of the Reserve Bank of Australia (RBA) interest rate hike rises. Australia’s Employment report for June will take center stage later on Thursday.
After delivering three consecutive 25 basis points (bps) hikes earlier this year, the Australian central bank decided to hold the Official Cash Rate (OCR) steady at 4.35% at its June policy meeting.
Nonetheless, the ongoing US-Iran conflict has triggered energy-driven inflation fears. This has fueled speculation that the RBA will tighten policy further, supporting the Aussie. Traders raise their bets on an RBA rate hike since airstrikes resumed last week, now pricing in nearly a 23% chance of a hike in August and more than a 50% probability by December, according to the Guardian.
Traders await the release of the Australian June employment data on Thursday. Markets expect employment to rise by 15,000 jobs, while the Unemployment Rate is forecast to hold steady at 4.4% for a second consecutive month. If the report shows stronger-than-expected outcomes, this could lift the Aussie against the USD.
The US military has launched an 11th consecutive night of strikes against Iran, with explosions reported in northwestern Iran’s Tabriz region. Late Tuesday, Iran's top joint military command said that Tehran will expand its strikes and target the US and its allies' interests across the region if the US attacks Iran's nuclear sites, per Xinhua news agency. Rising tensions in the Middle East could boost safe-haven flows, benefiting the Greenback in the near term.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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