AUD/USD rallies to 10-day highs near 0.7200 amid US Dollar weakness

The Australian Dollar (AUD) accelerates its rally against a weak US Dollar (USD) on Monday, reaching 10-day highs at 0.7190 at the time of writing, after bouncing from lows near 0.7100 last week. News of a peace proposal from Tehran and hopes that high energy prices will boost inflation and force the Reserve Bank of Australia (RBA) to hike rates next week are keeping the Aussie buoyed.

A report published by Axios earlier on Monday, citing a US official and sources related to the matter, affirmed that Tehran has sent a peace proposal to the US, offering to end the war and reopen the Strait of Hormuz, and to postpone nuclear conversations to a later stage. This news helps sustain hopes of a negotiated end to the conflict and adds weight to the US Dollar.

Central banks return to the focus

The US Federal Reserve (Fed) will also come into focus this week. The US central bank’s Federal Open Market Committee (FOMC) meets on Wednesday and is widely expected to leave interest rates unchanged at the 3.50%-3.75% rate.

The bank is also likely to hint at a steady policy for the next few months. The rising inflationary pressures stemming from Iran’s war have prompted markets to dial down hopes of interest rate cuts this year, and the CME Fed Watch Tool shows that futures markets price a 66% chance that monetary policy will remain on hold by the end of the year. Investors were betting on between one and two rate cuts before the war started.

Before that, Australian Consumer Price Index (CPI) figures will provide further insight about next week’s RBA decision. Inflation is expected to have accelerated in the first month of the US-Iran war, boosting speculation that the central bank might hike interest rates for the third consecutive time in May. These rumours are keeping the Aussie Dollar close to multi-year highs against the US Dollar.