AUD/USD edged up to around 0.7070 in early Asian trade on Wednesday after the Reserve Bank of Australia kept policy settings unchanged while retaining a tightening bias. The RBA held its Official Cash Rate at 4.35% at its June meeting, marking a pause after three straight 25 bps increases earlier this year. Although rates were left steady, the board reiterated that further rises may still be required to meet its objectives as it seeks to prevent inflation becoming entrenched once the effect of higher oil prices has flowed through.
Geopolitical developments also shaped price action, with headlines around a potential US-Iran agreement supporting higher-beta currencies. US Vice-President JD Vance said President Donald Trump may release a preliminary deal before Friday, after Trump indicated the agreement had already been signed, while Iran’s Foreign Minister Seyed Abbas Araghchi said a new round of talks towards a final deal would begin in Switzerland the same day. Attention then turns to the Federal Reserve decision on Wednesday, where the benchmark rate is expected to stay in a 3.50% to 3.75% range, with scrutiny on the press conference for guidance under chair Kevin Warsh.
RBA Policy and AUD Outlook
We see the Reserve Bank of Australia’s recent hawkish hold as a clear signal for Aussie strength. The RBA’s determination to fight inflation, especially after the latest quarterly CPI data showed a stubborn rise to 3.8%, suggests the cash rate will stay elevated. This leads us to favor buying call options on AUD/USD, betting on a rise above the 0.7100 level in the next few weeks.
Geopolitics, Fed Decision, And Trade Strategy
The potential US-Iran peace agreement introduces a significant “risk-on” sentiment into the market, which typically benefits the AUD. We are looking at this as an opportunity to sell volatility, as a confirmed deal would likely calm markets and reduce currency swings. Historically, similar geopolitical de-escalations have led to a noticeable drop in implied volatility for risk-sensitive assets.
With the Federal Reserve meeting today, we are bracing for potential dollar weakness. The market is pricing in a hold, but the real focus is on new Chair Kevin Warsh’s tone, especially after last week’s Non-Farm Payrolls report showed a surprise slowdown in job growth. To trade this uncertainty, we are considering long straddle options on USD-related pairs to profit from a significant price move in either direction following the press conference.
Our core view combines a strengthening AUD with a potentially softening USD. The interest rate differential between Australia’s 4.35% and the US’s 3.75% provides a fundamental tailwind for the pair. We believe this spread, currently at 60 basis points, could widen if the Fed hints at a more dovish stance, further supporting our long AUD/USD positions.
