Australian Dollar drops amid Israel-Iran conflict, eyes on US NFP data

• The Australian Dollar losses steam after failing to hold gains above 0.6900.
• Geopolitical tensions between Israel and Iran spur safe-haven demand for the US Dollar.
• US unemployment claims rising above estimates, and strong ISM Services PMI data reduces chances of further aggressive Fed rate cuts.

The Australian Dollar (AUD) loses more than 0.50% against the US Dollar on Thursday, dropping after hitting a daily high of 0.6888 amid concerns that the Israel-Iran war could broaden in the Middle East. This spurred flows toward the Greenback, which briefly topped 102.00 via the US Dollar Index (DXY), but mixed US data capped its gains. The AUD/USD trades at 0.6844.

A risk-off impulse is weighing on the Aussie Dollar. Discussions between the US and Israel continued on how to retaliate against Iran. A headline that US President Joe Biden discussed with Israel a possible attack on Iran's oil facilities dented appetite for riskier assets like the AUD.

Data revealed by the US Department of Labor showed that the number of people filing for unemployment benefits increased above estimates. Meanwhile, business activity data in the services sectors, revealed by the Institute for Supply Management (ISM) exceeded estimates in September, portraying a robust economy, which could erase the chances for a further 50 basis points (bps) of rate cuts by the Federal Reserve (Fed).

In the meantime, the Balance of Trade in Australia printed a surplus in August, which exceeded estimates of A$5.5 billion, came at A$5.64 billion, up from July's A$5.636 billion.

Besides that, Australia's Judo Bank Services Purchasing Managers Index (PMI) decelerates from 52.5 to 50.5 in September. This could refrain the Reserve Bank of Australia (RBA) from adopting a hawkish stance amid concerns that the economy is cooling.

Ahead in the calendar, the Australian economic docket will feature Home Loans and Investment Lending for Homes in August.

Daily digest market movers: Australian Dollar tumbles on risk aversion ahead of US NFP

• US Initial Jobless Claims for the week ending September 28 increased from 219K to 225K, surpassing the estimate of 220K.
• The ISM Services PMI for September expanded from 51.5 to 54.9, while Factory Orders for August declined by -0.2%, missing the 0% estimate and down from the previous month's 4.9% increase.
• US Nonfarm Payrolls, due on Friday, are expected to show 140K jobs added in September, slightly below the 142K jobs in August, with the Unemployment Rate projected to remain unchanged.
• Market participants have placed the odds of a 25 bps rate cut at 66.7%, while the chances of a larger 50 bps cut have decreased to 33.3%, according to the CME FedWatch Tool.
• China's business activity has deteriorated, which has led to increased stimulus from the People's Bank of China (PBoC) and the Politburo.
• To stimulate the economy, the PBoC cut loan rates, reduced bank reserve capital requirements and even lowered property down payments. If China's economy continues to print deflationary readings, it could miss its Gross Domestic Product (GDP) 5% goal for 2024.

Technical outlook: Australian Dollar extends its losses below 0.6850

The AUD/USD remains upwardly biased, but in the short-term the Aussie could test lower prices. The ongoing pullback broke the first support level at 0.6871, exacerbating a drop toward the 0.6800 figure.

From a momentum standpoint, the Relative Strength Index (RSI) is mixed, remaining in bullish territory. However, the RSI is falling almost vertically toward its neutral line. Hence, further AUD/USD downside is seen.

Once AUD/USD cleared the October 1, 2024 low of 0.6856, that has opened the door to challenge the 0.6800 figure. Once surpassed, the next stop would be the 50-day Simple Moving Average (SMA) at 0.6707.

Conversely, if AUD/USD aims higher and closes above 0.6900, look for a retest of the year-to-date high of 0.6934.