AUD/USD rose to about 0.7215 in early Asian trading on Monday. The Australian dollar advanced as markets expected a Reserve Bank of Australia rate rise on Tuesday.
Reuters put the odds of a third consecutive RBA rate increase at nearly 80%. Australian headline CPI inflation rose to 4.6% year on year in March, below the 4.7% forecast but above the bank’s target range.
Rba Expectations Lift The Aussie
Middle East tensions supported demand for the US dollar as a safe-haven, which could limit gains in AUD/USD. Bloomberg reported that US President Donald Trump said the US would start guiding some neutral ships in the Persian Gulf out through the Strait of Hormuz from Monday.
An Iranian official said any US interference in the Strait of Hormuz’s new maritime regime would be seen as a ceasefire violation. These developments added to uncertainty around the currency pair.
We remember looking at this exact situation back in early May 2025, when the market was pricing in an aggressive Reserve Bank of Australia. Headline inflation had just hit 4.6%, pushing the AUD/USD exchange rate toward 0.7215 on the expectation of another rate hike. The primary trade was to be long the Australian dollar, but it was complicated by tensions in the Persian Gulf.
Today, the dynamic has completely changed, as those rate hikes from last year have worked to cool the economy. The latest quarterly CPI data showed inflation has fallen to 2.8%, well within the RBA’s target range. In contrast, US core inflation remains sticky at 3.7%, meaning the Federal Reserve is signaling no rate cuts until at least the end of this year.
Policy Divergence And Downside Risks
This growing policy divergence, with a dovish RBA and a hawkish Fed, creates a fundamental downward pressure on the AUD/USD pair. We’ve seen one-month implied volatility on the pair creep up from 9% to 12.5% over the last few weeks, indicating the market is preparing for a move. Therefore, positions that benefit from a weaker Australian dollar appear logical.
Much like the Middle East risk we saw in 2025, we now face geopolitical uncertainty from ongoing trade disputes in the South China Sea. Any escalation there would likely trigger a flight to safety, further strengthening the US dollar as a safe-haven asset. This acts as a potential catalyst that could accelerate any AUD/USD decline.
Given this outlook, we are considering strategies like bear put spreads for the June and July expiries. This approach allows us to capitalize on a potential slide in the AUD/USD driven by central bank policy differences. Crucially, it also defines our maximum risk, which is prudent in case a sudden resolution in trade tensions causes an unexpected snap-back rally.
