The Australian Dollar fell 0.2% to near 0.7030 against the US Dollar during Thursday’s European session. It weakened as risk appetite dipped amid doubts about the two-week US–Iran ceasefire announced early Wednesday.
S&P 500 futures were down 0.2% near 6,770 at the time of reporting. The US Dollar Index rose 0.1% to near 99.10.
Ceasefire Doubts Drive Risk Aversion
Concerns about the ceasefire followed continued attacks by Israel on Iran-backed Houthis in Lebanon. Iran’s parliament speaker and chief negotiator, Mohammad Bagher Qalibaf, said the US violated the first clause of a 10-point proposal calling for “an immediate ceasefire everywhere, including Lebanon and other regions, effective immediately”.
The US and Iran said they will send teams to Pakistan for a first round of talks on the 10-point peace proposal. The talks are scheduled to begin on Saturday.
On policy, traders see a 60% chance the Reserve Bank of Australia will raise its Official Cash Rate again at the May meeting, according to Reuters. Expectations are linked to high inflation pressures in Australia.
In the US, markets are watching the March Consumer Price Index data due on Friday.
We recall how the Australian dollar weakened in early April 2025 due to uncertainty around the US-Iran ceasefire, even as the market priced in another RBA rate hike. Today, the AUD trades significantly lower around 0.6650, as the monetary policy outlook has completely reversed. Geopolitical risk remains a factor, but central bank policy is the main driver of our current strategy.
Policy Regime Shift And Strategy Implications
That period last year taught us how sensitive the Aussie dollar is to Middle East headline risk, which can overshadow domestic factors in the short term. The initial fragility of that 2025 ceasefire created significant volatility, a lesson we must apply to current tensions. We should consider buying cheap, out-of-the-money put options on the AUD/USD to hedge against any sudden flare-ups that could trigger a similar risk-averse move.
Unlike in 2025 when a 60% chance of an RBA rate hike was priced in for May, the conversation has now shifted entirely. The Reserve Bank of Australia has held its cash rate at 4.35% for several months, and market pricing now suggests the next move is more likely to be a cut late this year or in early 2027. This removes a key pillar of support that the Aussie dollar had twelve months ago.
The inflation dynamic has also changed significantly since we were looking at the March 2025 US CPI data with anticipation. While Australian inflation remains stubborn, recently tracking at a 3.6% annual rate, US inflation has cooled more effectively, with the latest figures showing a 2.9% annual increase. This divergence justifies the Federal Reserve’s patient stance and the RBA’s prolonged pause, weighing on the AUD/USD pair.
Given this backdrop, selling strength in the Aussie dollar appears to be the prudent approach for the coming weeks. With the RBA on hold and the AUD’s sensitivity to global risk, we see limited upside potential compared to this time last year. Selling AUD/USD call option spreads could be an effective strategy to generate income while defining risk, capitalizing on the view that the pair will struggle to rally past key resistance levels.
