AUD/USD moved towards the 0.7180 area on Friday, with the US Dollar under pressure as risk appetite improved on reports of progress towards a longer ceasefire between the US and Iran. US media said the two sides had a memorandum of understanding to extend the ceasefire by 60 days, reopen the Strait of Hormuz and begin nuclear talks. Meanwhile, the Core PCE Price Index held at 3.3% year-on-year in April, matching expectations, as the Middle East conflict continued to underpin inflation pressures.
Uncertainty persists because President Donald Trump has not formally approved any deal and Iranian officials said the memorandum is not finalised. In technical terms, the pair traded at 0.7181 on the four-hour chart, sitting just above the 100-period SMA at 0.7179 and the 20-period SMA at 0.7150, while RSI hovered near 61. Resistance was seen around 0.7190, with support at 0.7180 and 0.7179, followed by 0.7167 and 0.7160 if selling deepens.
Geopolitical Drivers And Risk Management
We see the potential US-Iran deal as the main driver for the Australian dollar right now. The positive news is pushing the AUD/USD pair higher, but the situation is fragile because the agreement is not yet final. This uncertainty suggests using options to manage the clear risks in the coming weeks.
A confirmed ceasefire would likely weaken the US dollar as traders sell safe-haven assets. This would benefit the Aussie, especially with iron ore prices, a key Australian export, holding steady above $110 per tonne in recent trading. This is similar to the risk-on rallies we saw in late 2023 when markets began pricing in Federal Reserve rate cuts.
However, we are cautious because of the skepticism from Iranian officials. A breakdown in talks could cause a sharp reversal, sending the US dollar higher as risk aversion returns. The persistent US Core PCE inflation, holding at 3.3%, means another energy price shock could force the Federal Reserve to remain hawkish, further strengthening the dollar.
Volatility And Technical Levels
Given these two very different potential outcomes, we expect a surge in volatility. This makes buying options, such as a straddle, a logical strategy to profit from a large price swing in either direction. Historically, geopolitical events of this magnitude have caused implied volatility in major currency pairs to jump significantly over a few weeks.
Technically, we are watching the 0.7190 resistance level. A firm break above that point would suggest more upside for the Aussie dollar. On the other hand, a drop below the 0.7160 support area would indicate that the positive momentum has failed.
