AUD/USD retreated from a 46-month high of 0.7227 set on 1 May and traded near 0.7200 during European hours on Monday. The pair weakened as the US Dollar gained on safe-haven demand after Iran’s armed forces warned of a harsh response if the US enters the Strait of Hormuz.
Iran’s army said commercial ships and oil tankers must not move through the Strait of Hormuz without coordination with the Iranian military. President Donald Trump said on Sunday the US will begin guiding neutral ships stranded in the Persian Gulf out through the strait starting Monday.
Attention is also on the Reserve Bank of Australia meeting on Tuesday, with expectations of an interest rate rise. On 1 May, the ASX 30 Day Interbank Cash Rate Futures May 2026 contract traded at 95.745, implying a 74% probability of a hike to 4.35%.
Australian inflation data has influenced rate expectations amid global energy shocks and Middle East tensions. Headline CPI rose to 4.6% year-on-year in March, below the 4.7% forecast and above the central bank’s target range.
The TD-MI Inflation Gauge increased 0.6% month-on-month in April after a 1.3% rise previously. ANZ Job Advertisements fell 0.8% month-on-month, after a 3.2% decline in March.
The AUD/USD is pulling back from its recent highs as we see classic safe-haven demand for the US Dollar. Tensions in the Strait of Hormuz are the main driver, with recent reports showing Brent crude futures surging over 5% to trade above $110 a barrel. This situation is reminiscent of the tanker incidents we saw back in mid-2019, which also caused short-term volatility in energy and currency markets.
Despite this, we are watching the Reserve Bank of Australia very closely, with a rate hike widely expected tomorrow. The market has priced in a high probability of a move, causing one-week implied volatility for AUD/USD options to jump to 14.5%. This is the highest level we’ve seen since the banking sector concerns back in late 2025.
The pressure for the RBA to act comes from last month’s high inflation reading of 4.6%. However, we’ve also seen signs of a cooling economy, with job advertisements falling for a second month and recent data showing retail sales unexpectedly contracting by 0.3% in April. This complicates the central bank’s decision and fuels market uncertainty.
For derivative traders, this environment suggests preparing for a significant price swing rather than betting on a single direction. The elevated volatility indicates that strategies like straddles, which profit from a large move regardless of direction, are being considered around the RBA announcement. Many are also likely looking at buying AUD puts to hedge against either a military escalation or a less aggressive central bank.
