Aussie Dollar Pressured Despite RBA Hike

The Australian dollar climbed to above $0.72, hitting a fresh four-year high after the Reserve Bank delivered a widely expected 25bp hike to 4.35%, while risk sentiment improved amid signs of de-escalation in the Middle East conflict. In an eight to one vote, the RBA raised the cash rate for a third straight meeting, underscoring its focus on bringing inflation back to the 2–3% target. 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 see only a 20% chance of another move in June, while a further increase toward 4.60% by September remains fully priced. On the geopolitical front, optimism grew that a deal with Tehran could be within reach, after the US declared an end to offensive operations against Iran, reaffirmed the ceasefire, and temporarily paused efforts to help stranded vessels exit the Strait of Hormuz.

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.