AUD/USD traded around 0.7160 in Asian hours on Wednesday, extending gains for a second day even as the Australian dollar eased after fresh inflation data. The ABS reported CPI rose 4.2% year-on-year, below the 4.4% consensus and down from 4.6% in the 12 months to March 2026. Monthly CPI printed at 0.4% in April versus 1.1% previously, while the RBA Trimmed Mean CPI rose 0.3% on the month and 3.4% on the year.
Downside pressure on the pair was tempered as the US dollar edged lower on softer safe-haven demand linked to hopes the US and Iran could still reach an agreement despite renewed regional tensions. Iran’s foreign ministry condemned US airstrikes in Hormozgan province as a “gross violation” of a seven-week-old ceasefire, after Iranian media reported explosions early Tuesday. The US military said it carried out self-defence strikes, while Iran’s Revolutionary Guard said it targeted an American F-35 and several drones that allegedly breached Iranian airspace, adding that it reserved the right to retaliate for any ceasefire violations by the US.
Soft Australian Inflation Data Places RBA on Hold
Given the Australian inflation data for April 2026 came in softer than expected at 4.2%, we believe the Reserve Bank of Australia will be less inclined to raise interest rates. This removes a key pillar of support for the Australian dollar. The market had priced in a higher number, so this downside surprise is significant for our short-term outlook.
We see this disinflationary trend continuing, which will likely keep the RBA on hold through its next meeting. As of today, May 27, 2026, money markets have already reduced the probability of a rate hike in the third quarter from 40% down to just 15%. This shift in interest rate expectations makes the Aussie dollar less attractive compared to other currencies.
Geopolitical Risks Favor the US Dollar and Strategy Implications
At the same time, we are monitoring the escalating tensions between the United States and Iran. These geopolitical events are creating a flight-to-safety sentiment in global markets, which traditionally strengthens the US Dollar. The recent confirmation of US military strikes inside Iran is a serious development that overrides any vague hopes of a diplomatic agreement for now.
Historically, periods of heightened conflict in the Middle East have caused the US Dollar Index (DXY) to strengthen by an average of 2-3% within a few weeks. This safe-haven demand adds another layer of downward pressure on the AUD/USD pair. We expect this will also increase market volatility, making options pricing more expensive.
Considering these two factors, we see a clear path for AUD/USD weakness in the weeks ahead. We would suggest positioning for a move lower by purchasing AUD/USD put options with July expirations to capitalize on this expected trend. This strategy allows for defined risk while providing exposure to potential downside in the currency pair.
