Aussie Holds Firm Near 4-Year Highs

The Australian dollar fell to around $0.72, but remained near four-year highs as the government’s annual budget and heightened inflation risks from the prolonged conflict in the Middle East kept expectations of further rate hikes intact. The 2026/27 budget pointed to smaller deficits and introduced notable changes to housing tax settings, but largely left the task of controlling inflation to the Reserve Bank. Markets still imply around a 20% chance of a June hike to the 4.35% cash rate, but the probability of an August move to 4.6% edged above 80%. Latest data also had limited impact, with wage growth coming in as expected in the first quarter while the annual pace eased slightly but remained consistent with persistent labor cost pressures, signaling ongoing inflation resilience. Meanwhile, global energy prices remained elevated as efforts to broker an end to the US-Iran war have made little progress and the Strait of Hormuz remained heavily restricted amid ongoing naval tensions.

The Australian dollar fell to around $0.72 but stayed near its highest since April 2022 as investors turned cautious amid uncertainty in US-Iran peace talks, while the upcoming government budget reinforced efforts to contain inflation. Australia’s government is set to unveil its annual budget on Tuesday, with expectations of a narrower-than-forecasted deficit of around A$25 billion, or 0.8% of GDP. The budget is expected to emphasize spending restraint, including changes to investment tax settings, and a tighter fiscal stance could help ease inflationary pressures and reduce the need for further rate hikes later this year. Swaps currently imply an 18% chance that the Reserve Bank will raise rates in June, while an August move is about 82% priced in, with rates near 4.6% fully priced in by September. Meanwhile, the US and Iran continued to struggle toward a diplomatic resolution in the conflict, while the Strait of Hormuz remains effectively closed, keeping energy prices elevated.

The Australian dollar held around the $0.72 level after retreating in the previous session, as renewed Middle East tensions trimmed its weekly advance. The currency is headed for only a modest 0.3% weekly gain, as renewed clashes between the US and Iran weakened hopes for a near-term peace agreement, boosting demand for the safe-haven US dollar. The latest escalation followed US attempts to exit a conflict now in its third month, while awaiting Iran’s response to its proposal to reopen the Strait of Hormuz, a vital waterway for energy flows. The near-closure of the strait and the resulting energy price shock have fueled concerns about rising inflation, which could keep interest rates higher for longer. In Australia, markets are pricing around just a 20% chance of another rate hike in June by the Reserve Bank, after 75bps of tightening to 4.35% over the past three meetings. The probability rises to about 68% for August, with a terminal rate near 4.6% almost fully priced in by September.