Global Market Overview
According to ETO Markets analysis, global markets were driven this week by renewed inflation concerns, diverging central bank expectations, and increasing uncertainty across commodity markets.
US headline PCE inflation accelerated to 4.1%, while core PCE rose to 3.4%, marking the strongest inflation readings since 2023. As a result, markets have significantly repriced Federal Reserve expectations, with investors now assigning a higher probability of three additional rate hikes in 2026.
The stronger US dollar continued to pressure precious metals, with gold extending recent losses despite lingering geopolitical risks. Meanwhile, Europe offered some relief as inflation eased to 3.5%, while China's industrial profits improved to 18.8%, suggesting parts of the manufacturing sector remain resilient despite weaker domestic demand.
Australia delivered softer inflation and employment figures, increasing expectations that the Reserve Bank of Australia may adopt a more cautious policy stance. However, falling commodity prices—particularly iron ore—continue to cloud the outlook for both the Australian dollar and the broader share market.
Australia's Economy Faces a New Turning Point
This week's ETO Markets Buzz focuses on Australia.
Following one of the most aggressive tightening cycles in decades, inflation is finally showing clearer signs of moderation. Monthly inflation declined by 0.7%, while annual inflation eased to 4.0%. Labour market conditions also softened, with unemployment edging up to 4.4%, although labour force participation continued to improve.
For investors, this raises two important questions:
- Can AUD/USD continue to recover?
- Is the ASX 200 becoming vulnerable to a broader correction?
The answers increasingly depend less on domestic monetary policy and more on commodity markets and China's economic recovery.
Iron Ore Remains the Biggest Driver for AUD/USD
Although softer inflation has reduced pressure on the Reserve Bank of Australia to continue tightening aggressively, commodity prices remain the dominant force behind the Australian dollar.
Iron ore prices have fallen more than 8% over the past month, reflecting weaker demand from China's property and construction sectors. As Australia's largest export, iron ore plays a critical role in determining Australia's terms of trade, export earnings, and ultimately the direction of AUD/USD.
Should Chinese infrastructure spending stabilise and industrial demand improve, the Australian dollar could regain momentum. However, if China's recovery continues to disappoint, AUD upside may remain limited despite expectations for a less hawkish RBA.
Energy markets add another layer of complexity. Higher LNG and coal prices can support Australia's export income, but if rising energy prices are driven primarily by geopolitical tensions rather than genuine economic demand, investors may continue favouring the US dollar as a safe-haven currency.
ASX 200 Correction Risks Continue to Build
The outlook for Australian equities is becoming increasingly challenging.
While markets have welcomed softer inflation, investors may have become overly optimistic that interest rates are close to peaking. Inflation remains well above the RBA's target, household spending continues to weaken, and mortgage repayments remain elevated.
The property market is also showing signs of slowing. Recent auction clearance rates have fallen below 50%, indicating softer buyer confidence and weaker housing demand. This matters because Australia's banking sector, construction industry, REITs and consumer discretionary companies remain closely linked to residential property activity.
Valuation risk is also increasing.
If inflation proves more persistent than expected, or if the RBA maintains higher interest rates for longer, Australian equity valuations—particularly across banks and high-dividend sectors—may face additional pressure.
Commodity Markets Remain the Key Variable
For both the Australian dollar and the ASX 200, commodities remain the biggest variable.
Iron ore weakness continues to weigh on Australia's outlook, while uncertainty surrounding China's economic recovery limits confidence in the resources sector. Major miners represent a significant portion of the ASX 200, meaning any further deterioration in commodity demand could have an outsized impact on the broader market.
According to ETO Markets, unless Chinese industrial activity improves and commodity prices stabilise, both AUD/USD and Australian equities are likely to remain defensive despite improving domestic inflation data.
Economic Calendar to Watch
Investors will closely monitor several major economic events over the coming week.
In the United States, markets will focus on Non-Farm Payrolls, JOLTS job openings, ADP employment, ISM Manufacturing PMI, factory orders and housing data to assess whether labour market conditions are beginning to soften. Europe's inflation releases and speeches from ECB policymakers will provide further guidance on the future direction of interest rates.
Meanwhile, China's official PMI surveys and Japan's Tankan business survey will offer important clues regarding regional economic momentum and global commodity demand.
ETO Markets Outlook
ETO Markets expects Australian financial markets to remain heavily influenced by global commodity trends rather than domestic monetary policy alone.
While easing inflation provides some support for the Reserve Bank of Australia's outlook, weaker iron ore prices and uncertainty surrounding China's recovery continue to limit upside for AUD/USD and increase correction risks for the ASX 200.
Until commodity demand shows clearer signs of recovery, investors should continue monitoring Chinese economic data, Federal Reserve policy expectations, and movements across global commodity markets as the primary drivers of Australian assets.