Australian Dollar bulls have the upper hand as RBA rate hike bets counter Middle East tensions

AUD/USD edges lower on Thursday as rising geopolitical tensions benefit the safe-haven USD.
Concerns about a war-driven rise in inflation lift the US bond yields and also underpin the buck.
Bets for an imminent RBA rate hike next week act as a tailwind for the Aussie and spot prices.

Haresh Menghani FXStreet

The AUD/USD pair attracts some sellers during the Asian session on Thursday, and for now, seems to have snapped a four-day winning streak to its highest level since June 2022, around the 0.7185 region, touched the previous day. Spot prices, however, rebound a few pips from the daily low and currently trade just below mid-0.7100s, down around 0.10% for the day.

As the US-Israeli war on Iran drags on, Crude Oil prices rally over 6% in reaction to reports that two tankers were attacked in the northern Persian Gulf near Iraq and Kuwait. This adds to concerns about supply disruptions from the Middle East and tempers investors' appetite for riskier assets, boosting demand for safe-haven US Dollar (USD) and prompting some profit-taking around the AUD/USD pair.

Meanwhile, the US Bureau of Labor Statistics reported on Wednesday that the headline Consumer Price Index (CPI) rose 0.2% MoM in February and the yearly rate held steady at 3.1%. This pointed to signs of moderate price growth in the US, though the latest geopolitical developments threaten the inflation outlook. This triggers a fresh leg up in the US Treasury bond yields and further underpins the USD.

That said, the Reserve Bank of Australia's (RBA) hawkish stance acts as a tailwind for the Australian Dollar (AUD) and limits losses for the AUD/USD pair. In fact, the RBA Deputy Governor Andrew Hauser warned on Tuesday that the spike in Oil prices would push inflation higher and add to pressure for a rate rise. Traders were quick to bring forward expectations for a second-rate hike as early as next week.

Adding to this, the Melbourne Institute reported that Australia's Consumer Inflation Expectation for March 2025 rose to 5.2% in February, marking the highest level since July 2023. Moreover, the possibility of 58 basis points (bps) of tightening for this year is priced in the market. This favors the Aussie bulls and warrants caution before positioning for any meaningful corrective decline for the AUD/USD pair.

Economic Indicator

Consumer Inflation Expectations

The Consumer Inflation Expectation released by the Melbourne Institute presents the consumer expectations of future inflation during the next 12 months. The higher expectations, the stronger the effect they will have on a probability of a rate hike by the RBA. Therefore, a high reading should be taken as positive, or bullish, for the AUD, while a low expectations are seen as negative or bearish.

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Why is Crude Oil priced for a reopening the ships haven't made?

Fourteen vessels crossed the Strait of Hormuz on Tuesday. Before the war, the count ran near 120 a day. In the sessions since the waterway was publicly declared open, Brent has drifted back to $87 and West Texas Intermediate to $81, both a little lower again on Wednesday, with daily momentum on each unwound from the top of its range in late July to the low twenties now.

Why is Crude Oil priced for a reopening the ships haven't made?

Fourteen vessels crossed the Strait of Hormuz on Tuesday. Before the war, the count ran near 120 a day. In the sessions since the waterway was publicly declared open, Brent has drifted back to $87 and West Texas Intermediate (WTI) to $81, both a little lower again on Wednesday, with daily momentum on each unwound from the top of its range in late July to the low twenties now.