AUD/USD failed to build on Monday’s rebound from 0.7115, a three-day low, and edged lower in Tuesday’s Asian session. It traded near 0.7165, down 0.15%, and remained close to last Friday’s highest level since June 2022.
Market direction stayed linked to the US-Iran dispute, including tensions around the Strait of Hormuz ahead of a second round of peace talks in Pakistan. This cautious mood supported the US Dollar, while higher crude oil prices added inflation concerns that also backed the Dollar and weighed on AUD/USD.
Further US Dollar gains were limited as markets reduced expectations of a US Federal Reserve rate hike. Pricing pointed to a roughly 45-50% chance of a Fed rate cut by year-end, compared with a more restrictive policy stance from the Reserve Bank of Australia.
RBA Deputy Governor Andrew Hauser said last week the bank remains focused on stopping medium-term inflation expectations from rising. Markets priced a 65% chance of a 25 basis point rise in May and projected a potential peak rate of 4.85% by mid-2026.
We are seeing the AUD/USD hover near its highest point since June 2022, around the 0.7165 level. While there is some selling pressure, any significant drops seem to find support, as they did recently at 0.7115. This suggests an underlying strength in the pair, even with day-to-day hesitation.
The core support for the Aussie dollar comes from the RBA’s firm stance against inflation, which we saw last year in 2025 persistently above their target. With Australia’s latest Q1 CPI data showing inflation at a stubborn 3.6%, the market is now pricing in a 65% chance of a rate hike next month to 4.60%. This contrasts sharply with the US, where Core PCE has cooled to 2.8%, making a Fed rate cut by year-end a real possibility.
However, ongoing tensions in the Strait of Hormuz and their effect on crude oil are keeping a lid on the pair. WTI crude prices are elevated, currently trading around $85 a barrel, reviving inflation fears globally and supporting the safe-haven US dollar. We saw a similar dynamic with energy prices back in 2022, where geopolitical events caused sharp, unpredictable market swings.
Given this tug-of-war, we should consider strategies that benefit from a gradual rise while managing risk from high volatility. A bull call spread could be effective, allowing us to profit from a move higher but with a defined cost and risk profile. This approach helps offset the expensive option premiums caused by the current geopolitical uncertainty.
