AUD/USD rose to about 0.7035 in early European trading on Friday, its highest level since 17 June, as markets leaned towards a further tightening step from the Reserve Bank of Australia. Pricing implies one additional move this year that would lift the Official Cash Rate to 4.6%, keeping the Australian Dollar supported against the US Dollar.
The US currency also eased after softer macro data. US GDP expanded 1.5% in Q2 2026, according to the Bureau of Economic Analysis, slowing from 2.1% in Q1 and falling short of the 2.1% consensus forecast. Set against that, an escalation in the Middle East added a potential support for the dollar through safe-haven demand, following US missile strikes in southern Iran, including Qeshm Island and areas of Bushehr, Fars and Khuzestan, and a subsequent condemnation from Iran’s parliamentary speaker.
Policy Divergence and Implications for AUD/USD
We see the AUD/USD pair hovering near 0.7035, its highest level since mid-June, due to a widening policy gap between Australia and the US. While the US economy is slowing down, the Reserve Bank of Australia is hinting at further tightening. We believe derivative traders should position for continued upward momentum in the Australian dollar over the coming weeks.
Australian inflation has remained sticky, prompting markets to fully price in a rate hike to 4.6% from the current 4.35% level. This cash rate has held steady since late 2023, making any further hike highly supportive of the currency. We recommend buying AUD call options with a strike price near 0.7100 to capture this expected upward move.
US Economic Data and Geopolitical Risks
This bullish outlook is supported by weak US economic data, which showed second-quarter GDP growth slowing to just 1.5% compared to 2.1% in the first quarter. Historically, such weak growth prints have led to a softer US dollar as markets anticipate interest rate cuts. We anticipate that this domestic economic drag will continue to weigh on the greenback in the near term.
However, we must monitor the escalating military conflict in the Middle East, especially after recent US missile strikes in Iran. Geopolitical flare-ups typically trigger a rush to safe-haven assets, which could suddenly strengthen the US dollar and hurt the Aussie. To guard against this, we advise traders to combine their long positions with cheap out-of-the-money USD call options to hedge against sudden market reversals.
