Australian Dollar Retreats After RBA Pause

The Australian dollar weakened to around $0.705 on Tuesday, moving back toward two-month lows after the Reserve Bank kept interest rates unchanged for the first time this year. In a unanimous vote, the central bank' s nine-member board held the cash rate at 4.35% in response to signs that three rate hikes earlier this year are beginning to filter through the nation’s economy. While policymakers reiterated that inflation remains elevated and warned that higher energy costs pose upside risks, a recent run of softer economic data gave the RBA room to pause and assess the impact of past tightening. Markets now await Governor Michele Bullock’s press conference later today for clues on whether policymakers are leaning toward an extended pause or retaining a tightening bias. Three of Australia’s four largest banks expect the RBA to keep rates unchanged for the remainder of 2026, with some analysts citing slowing economic momentum and even forecasting rate cuts next year.

The Australian dollar rose above $0.70, building on the previous week’s modest 0.4% gain to rebound from a recent two-month low, as global risk appetite strengthened after the US and Iran reached an interim peace agreement. The deal reportedly includes sanctions relief for Iran, the lifting of blockades, and the dismantling of Tehran’s nuclear program. This lifted sentiment across financial markets, with Asian equities rallying, the US dollar weakening, and oil prices falling sharply. The development also provided relief for central banks ahead of a busy week of policy meetings. In Australia, markets have fully priced out a June rate increase after a series of soft economic data reinforced signs that the Reserve Bank’s three rate hikes earlier this year are gaining traction. The odds of an August hike has also fallen to around 35% from more than 80% a month ago. The May CPI report, due on June 24, will be closely watched for clues on the persistence of underlying price pressures.

The Australian dollar held around $0.70 and was on track to finish the week little changed, as markets await the Reserve Bank’s upcoming policy decision next week. Markets are increasingly pricing in the possibility that the central bank has already concluded its tightening cycle after three rate hikes this year began to filter through the economy. A run of softer economic releases, from GDP to housing prices, reinforced expectations that policymakers will keep the cash rate unchanged at 4.35% on Tuesday. Investors also scaled back bets for an August rate hike, with the odds falling sharply from above 80% a month ago to around 35%. The May CPI report due on June 24, will be pivotal after an unexpectedly soft April inflation reading, as policymakers look for clearer evidence that price pressures remain strong. Meanwhile, global risk appetite improved after US President Trump said a deal with Iran could be reached as early as this weekend after postponing planned attacks against Iran.