The Australian dollar is trading near the key 0.7000 level against the US dollar on Monday, extending gains for a second consecutive session with a rise of nearly 0.3%. The move higher is supported by a temporary halt in hostilities between the US and Iran over the weekend, which triggered a significant drop in crude oil prices and a corresponding weakening of the US dollar.

Meanwhile, strong domestic employment data from June has reinforced market expectations for further interest rate hikes from the Reserve Bank of Australia, which has already raised rates three times this year. The upcoming release of June and second-quarter inflation data this week will be a critical determinant for the central bank's next policy move.

However, concerns over supply disruptions from the Middle East have not fully dissipated, as the Houthi group claimed responsibility for an attack on Saudi facilities along the Red Sea coast, maintaining a backdrop of geopolitical risk.

Geopolitical Risk Tempered for Now

The most immediate catalyst for the Australian dollar's rise is the temporary de-escalation of geopolitical tensions in the Middle East. After 13 consecutive days of escalating conflict, the US decided not to launch a new round of strikes against Iran over the weekend, and Tehran also suspended retaliatory attacks. This "temporary ceasefire" has driven a sharp pullback in oil prices, with US crude futures briefly falling to around $83.10 per barrel on Monday, while the US dollar weakened, providing upward momentum for the Australian dollar.

Nevertheless, the sustainability of this ceasefire remains questionable. The Houthi claim of an attack on Saudi facilities suggests the conflict is not entirely over, but has shifted from direct US-Iran confrontation to ongoing proxy friction. The lingering fear of supply disruptions through the two key energy chokepoints—the Strait of Hormuz and the Red Sea—limits the Australian dollar's upside potential.

The underlying reasons for the US pause in strikes are noteworthy. According to media reports, while the US has not publicly explained its rationale, some reports indicate that declining interceptor missile inventories and a shortage of viable targets within Iran are major constraints. Chairman of the Joint Chiefs of Staff General Mark Milley reportedly warned President Trump that continuing the current tempo of strikes would severely deplete critical ammunition stockpiles. This military constraint suggests that a large-scale US-Iran conflict is unlikely in the short term, but it also implies that hostilities could re-escalate once inventory is replenished.

Australian Jobs Data Boost Rate Hike Expectations, Inflation Data is Key

The fundamental support for the Australian dollar domestically is also solid. Australia's June employment data released last week significantly exceeded expectations, with 76,300 new jobs added (compared to a forecast of 15,300), the unemployment rate holding steady at 4.4%, and the participation rate rising to 67.0%, a one-year high. This robust jobs report has strengthened market expectations for further rate hikes by the Reserve Bank of Australia.

The RBA has already raised rates three times this year to 4.35% and has previously warned that the tightening cycle may not be over. The upcoming June and second-quarter inflation data this week will be crucial for verifying this outlook. If inflation data comes in higher than expected, market pricing for another RBA rate hike in August or September will increase, potentially giving the Australian dollar a new boost. Conversely, if inflation data is weaker than expected, the Australian dollar faces a correction risk.

From a yield differential perspective, the RBA's benchmark rate of 4.35% is already higher than the European Central Bank (2.25%), the Bank of England (3.75%), and the Bank of Japan (1%), ranking second only to the Federal Reserve (approximately 5.25%-5.50%) among major global central banks. If the RBA continues to hike while the Fed holds rates steady, the yield disadvantage for the Australian dollar against the US dollar will further narrow, providing structural support.

Fed Likely to Hold in July, but September Rate Hike Expectations Rise

The US dollar's short-term weakness is also influenced by expectations for Fed policy. The market widely anticipates the Fed will keep interest rates unchanged at its FOMC meeting this week, with CME FedWatch data showing the probability of a July rate hike has fallen from its high last week. However, market pricing for a September rate hike remains as high as 82%, suggesting that the US dollar's weakness could be temporary.

For the Australian dollar, the current policy environment is in a delicate balance. If the Fed proceeds with a hike in September while the RBA holds steady, the US-Australia yield differential will widen again, potentially weighing on the Australian dollar. If Australian inflation data forces the RBA to follow with a hike in August or September, the Australian dollar could gain additional rate support. Until the policy paths of the two major central banks become clearer, the Australian dollar's oscillation around the 0.7000 level is likely to continue.

Technical Analysis and Key Variables

Technically, the Australian dollar against the US dollar is currently trading above the 20-day moving average (MA20) at 0.6958, with the short-term moving average shifting from prior resistance to support. The three medium-to-long-term moving averages (MA50, MA100, MA200) are all sloping upward, suggesting a solid medium-term uptrend. The previous high of 0.7277 serves as a key medium-term resistance level.

On the technical indicators, the MACD's DIFF and DEA lines are running close to the zero line, with a faintly positive histogram appearing, indicating that bearish momentum is fading and bullish strength is gently recovering, though a strong bullish offensive has not yet formed. The RSI is at 52.59, comfortably above the 50 neutral level, exiting the prior oversold zone and showing a slight advantage for short-term bulls without entering overbought territory, leaving room for further upside.

Key variables to watch include: 1) Any new signs of escalation in the Middle East, as renewed conflict would boost safe-haven demand for the US dollar and be negative for the Australian dollar; 2) Australian inflation data, which, if above expectations, would increase RBA rate hike expectations and be positive for the Australian dollar; and 3) Policy signals from the FOMC meeting, where a less hawkish-than-expected Fed could further weaken the US dollar, benefiting the Australian dollar.

Summary

The Australian dollar against the US dollar is currently in a sensitive position, caught between competing bullish and bearish factors. The temporary de-escalation of geopolitical risks, marked by the US-Iran mutual pause in attacks and falling oil prices, provides short-term upward momentum, but the uncertainty in the Red Sea means this positive catalyst could reverse at any time. Strong Australian employment data supports RBA rate hike expectations, but this week's inflation data is the key to determining the next policy step.

In the short term, the battle for the Australian dollar around the 0.7000 level will depend on three major variables: whether the Middle East situation re-escalates, whether Australian inflation data surprises to the upside, and the policy signals from the FOMC meeting. Until these three variables become clear, the Australian dollar is likely to trade in a range between 0.6950 and 0.7050. For traders, the current operating environment requires simultaneously tracking geopolitical risks, inflation data, and central bank policy changes—a marginal shift in any one variable could disrupt the delicate balance around the 0.7000 level.