Aussie Dollar Steady Ahead of CPI Data

The Australian dollar climbed to above $0.72, hitting a fresh four-year high after the Reserve Bank delivered a widely expected quarter-point rate hike to 4.35%, while risk appetite strengthened on signs of de-escalation in the Middle East conflict. Often seen as a proxy for global risk, the Aussie gained as global equities rallied after the US declared an end to offensive operations against Iran and temporarily paused efforts to assist stranded vessels leaving the Strait of Hormuz. The upbeat tone also pressured the safe-haven US dollar, alongside a sharp rise in the yen amid talks of intervention from Japanese authorities. Meanwhile, the RBA extended its tightening cycle to a third straight meeting, reinforcing its commitment to returning inflation to the 2–3% target. Markets now see only a 20% chance of another move in June after three rate hikes gave policymakers room to assess developments in the Iran war, while a further increase toward 4.60% by September remains fully priced.

The Australian dollar fell to around $0.71, easing from four-year highs after the Reserve Bank delivered a widely expected 25bp hike to 4.35%, while leaving the prospect of further tightening uncertain. In an eight to one vote, the central bank raised the cash rate for a third consecutive meeting, returning it to levels last seen at the peak of the post-pandemic inflation surge. The decision marked a more hawkish stance than the split seen in March, though policymakers signaled that monetary policy is now “well placed to respond to developments,” hinting at a possible pause ahead. Markets now see only a low chance of another near-term move, though a further increase toward 4.60% by September remains fully priced. Still, the Aussie remained under pressure as a jump in oil prices weighed on risk sentiment and boosted safe-haven demand for the US dollar. Energy markets continued to be disrupted by escalating Middle East tensions and concerns over supply routes in the Strait of Hormuz.

The Australian dollar held its recent decline to below $0.72 on Tuesday, but remained near four-year highs as markets positioned ahead of a widely expected rate hike from the Reserve Bank later today. A quarter-point rise in the 4.1% cash rate is priced with an 85% probability, which would return it to its post-COVID peak of 4.35% when inflation was above 7%. A further move to 4.60% is priced by September, with a more than 50% chance of a third hike by year-end. However, a split vote today similar to the March meeting could scale back expectations for additional hikes and weigh on the Aussie. The currency has been the second-best G10 performer this year, but rising risks to economic growth from a prolonged Middle East conflict may lead the central bank to slow its tightening cycle after today’s decision, limiting further upside. Meanwhile, fresh data showed the composite PMI returned to expansion at 50.4, as services activity recovered, while manufacturing production continued to fall.