AUD Outlook: Geopolitical Shock Meets Technical Weakness

Markets are starting the week on edge after the US and Israel carried out coordinated strikes on Iran, reportedly killing its Supreme Leader and other senior officials. This sharply increases uncertainty around regional stability, oil supply, shipping routes and overall risk sentiment. Traders will be watching closely for retaliation or further military action, as headlines are likely to drive price action.

For the Australian dollar, the timing is sensitive. It has had a strong start to the year, but several AUD pairs are now flashing warning signs. AUD/USD formed a bearish inside week and gave back most of its gains. AUD/JPY and AUD/CAD also showed bearish patterns, while GBP/AUD and EUR/AUD ended multi-week losing streaks. This suggests bullish momentum in the Aussie is fading just as geopolitical risks rise.

On the domestic front, focus turns to RBA Governor Michele Bullock’s speech and upcoming PMIs and GDP data. Markets have fully priced in another 25 basis point hike by August, with high odds of a move by June and low odds for March. Strong data could bring forward rate hike expectations, while weak data seems less likely.

In the US, a heavy calendar leads into nonfarm payrolls, including PMIs, ISM surveys, ADP and retail sales. However, unless US data weakens sharply, geopolitical tensions may remain the main driver of the US dollar. Fed funds futures show only limited expectations of a July cut, and even that may prove optimistic.

Technically, the failed bull flag breakout and rising implied volatility point to growing downside risks. Risk reversals show rising demand for downside protection. A break below 0.70 would bring 0.69 into focus. A sustained move under that area would likely signal a broader risk-off move for the Australian dollar and other risk assets.

AUD/USD Daily Chart

In short, the Australian dollar enters the week with strong past performance but stretched positioning, weakening technical signals and rising geopolitical risk. If tensions escalate, downside pressure could build quickly.