AUD/USD retreated to about 0.6920 on Wednesday, down 0.13% on the day, as earlier Australian Dollar gains faded after Donald Trump said the memorandum of understanding with Iran designed to establish a ceasefire was “over”. He also said he no longer wants to negotiate with Iran, while announcing trade measures against Spain and renewing criticism of NATO, which lifted risk aversion and encouraged flows into safe-haven assets that supported the US Dollar. S&P 500 futures fell by more than 0.90%, and Oil prices rose on concern about potential supply disruption.
Middle East tensions intensified after US strikes hit Iranian military infrastructure following attacks on commercial vessels transiting the Strait of Hormuz, renewing focus on the security of the route used for a large share of global Oil exports. Earlier support for the AUD followed RBA Assistant Governor Sarah Hunter reiterating the central bank’s commitment to returning inflation to target while maintaining sustainable employment. Attention now turns to the June FOMC Minutes, due at 18:00 GMT, for clues on the policy outlook after officials opted against explicit forward guidance on interest rates; Fed Chair Kevin Warsh said such guidance was ill suited to current conditions.
Escalating Geopolitical Risks and Market Sentiment
The collapse of the Iran ceasefire completely changes the market’s tone, pushing us toward a risk-off stance. We’ve seen the VIX, a key measure of market fear, jump over 35% to 21.5, suggesting this uncertainty will persist in the coming weeks. In this environment, we believe long positions in risk-sensitive currencies like the Australian Dollar are particularly vulnerable and should be reduced.
We believe shorting the AUD/USD pair through futures or buying put options looks attractive, as the US Dollar benefits from its safe-haven status during geopolitical turmoil. The Aussie dollar is also facing headwinds from signs of a slowdown in China, with the latest Caixin Manufacturing PMI coming in at just 50.1, barely in expansionary territory. Considering these dual pressures, we see a potential for the pair to test the 0.6850 support level in the near term.
Oil Prices, Inflation, and Federal Reserve Outlook
Rising crude oil prices, now up 4% to over $85 a barrel for WTI, are a direct result of fears surrounding the Strait of Hormuz, a chokepoint for nearly a fifth of global supply. This situation reminds us of the initial energy price shock in 2022, which complicated central bank policies by fueling inflation. We anticipate that options traders will start pricing in higher inflation expectations, which could influence the upcoming Federal Reserve minutes.
All eyes are now on the Federal Reserve minutes, which will be read through this new inflationary lens. With June’s US CPI data already coming in hot at 3.6%, any hawkish undertones from policymakers could further strengthen the US Dollar. We will be positioning for increased volatility around this release, using straddles or strangles on major indices to capture any sharp moves driven by the Fed’s uncertain outlook.
