The Australian dollar held its recent gains around $0.70, trading near a three-week high as broad weakness in the US currency offset worries over escalating conflict in the Middle East. The US has launched another round of strikes on Iranian coastal military assets and reinstated a naval blockade of Iran. This renewed tension has driven oil prices sharply higher and revived concerns about inflation.
Even so, the softer US dollar continued to support the Aussie, with easing US inflation pressures dampening expectations of a near-term Federal Reserve rate hike. In Australia, inflation expectations declined for a third consecutive month to a six-month low of 4.7% in July 2026, from 5.5% in the previous month.
Despite this moderation, markets are currently assigning only about a 20% probability to an interest rate increase in August, rising to roughly 60% by December. Traders are now focused on upcoming key labour market and inflation releases later this month for clearer signals on the future path of monetary policy.
