AUD/USD falls as rising geopolitical tensions strengthen USD, while expectations for an RBA rate increase remain

AUD/USD Slides Amid Renewed US Dollar Strength

The AUD/USD pair declined on Thursday, trading near 0.7095 at the latest update—a drop of 0.83% for the day. This comes after the currency pair touched its highest point since June 2022, reaching close to 0.7185 on Wednesday. The recent retreat is largely attributed to a resurgence in demand for the US Dollar, as investors adopt a more cautious approach.

Geopolitical Tensions Fuel Market Uncertainty

Ongoing conflicts involving Iran, Israel, and US military forces are shaping market sentiment, leading to a rise in risk aversion worldwide. Fears of possible interruptions to oil shipments through the Strait of Hormuz have driven energy prices higher, sparking renewed concerns about inflation. In this climate, US Treasury yields have climbed, and the US Dollar has gained ground, benefiting from its reputation as a safe-haven asset during times of geopolitical stress.

US Economic Data Supports the Greenback

Recent economic indicators from the United States have further bolstered the Dollar. Last week’s initial jobless claims totaled 213,000, coming in below the anticipated 215,000. Additionally, housing starts increased to 1.487 million, surpassing market forecasts.

Australian Monetary Policy May Offer Support

Although the Australian Dollar is currently under pressure, expectations around the Reserve Bank of Australia’s (RBA) monetary policy could provide a cushion. Financial institutions such as ING and DBS note that markets are increasingly factoring in a 25 basis-point rate hike by the RBA at its March 17 meeting. ING suggests that if equity markets remain robust, AUD/USD could aim for the 0.7200 level.

RBA Rate Hike Projections

Meanwhile, TD Securities anticipates that the RBA will implement two rate increases by May, potentially raising the Cash Rate to 4.35%. This forecast reflects ongoing economic strength and persistent inflationary pressures in Australia. Such a divergence in monetary policy could help limit downside risks for AUD/USD, even as global markets remain risk-averse.