Aussie Dollar Rebounds on Rate Hike Bets

The Australian dollar rose to around $0.70 on Monday, recovering from losses in the previous week, primarily due to increasing investor expectations of a back-to-back interest rate hike amid rising geopolitical tensions in the Middle East. Over the weekend, the US struck military targets near Kharg Island, Iran’s key oil export hub, and warned it could expand attacks on energy infrastructure if shipping through the Strait of Hormuz is disrupted. Australia opted not to deploy naval vessels to the Strait of Hormuz after Washington sought allied support to safeguard maritime traffic. The latest escalation has pushed oil prices higher, prompting concerns about inflation. The RBA is scheduled to announce its latest monetary policy decision on Tuesday, with markets expecting a second consecutive rate hike to 4.1% and pricing in up to three more increases by year-end, potentially pushing the policy rate to around 4.6%, surpassing the previous peak of 4.35%.

The Australian dollar held its recent decline to around $0.709 but remained firm near three-year highs and set for a sharp weekly gain, as prospects of higher interest rates at home offset intensifying global risk aversion. Markets remained on edge as Iran stepped up attacks on oil and transport facilities across the Middle East, and the new Supreme Leader vowed to keep the Strait of Hormuz effectively closed. As a result, oil prices climbed as the prolonged conflict threatened to curb energy supplies, stoking fears of a global economic downturn. Still, the Aussie continued to benefit from wagers that the Reserve Bank would raise its cash rate by a quarter-point to 4.10% next week to contain inflation. Domestic cost-of-living concerns from higher fuel prices pushed markets to price a 78% chance of a rate hike at the March 17 meeting, up from below 30% earlier in the week. Another move is fully priced by August, with traders expecting about 60 basis points of total tightening this year.

The Australian dollar strengthened to around $0.716, hitting its highest level since May 2022, boosted by mounting expectations of a rate hike next week. The Reserve Bank’s deputy governor signaled that rising oil prices could push inflation higher, increasing pressure for a rate increase at the March 17 meeting, which the central bank has described as “live” on rates. Markets quickly lifted the odds of a March hike to around 75%, up from below 30% earlier in the week, with another move now fully priced by August. In total, traders are pricing about 60 bps of tightening this year, which could push the cash rate above its post-pandemic peak hit when inflation exceeded 7%. Currently, the headline inflation sits at 3.8% and is expected to surpass 4% as petrol prices continue to climb, while core inflation remains elevated at 3.4%, well above the RBA’s 2–3% target band. Elsewhere, markets remained on edge amid conflicting reports and mounting uncertainty surrounding the Middle East war.