AUD/USD failed to build on Tuesday’s hawkish Reserve Bank of Australia bounce and stayed on the back foot for a second day on Wednesday, although it held above 0.7050 as markets awaited the outcome of the two-day FOMC meeting. The Federal Reserve is due to announce its decision later in the US session and is expected to keep rates unchanged, while shifting away from an easing bias as inflation remains sticky. Attention is set to fall on the policy statement, updated economic projections and the dot plot, while Fed Chair Kevin Warsh’s press conference is likely to shape US dollar direction and near-term momentum in the pair.
Ahead of the event risk, sentiment has been shaped by optimism over an interim US-Iran peace framework aimed at ending a war that began earlier in 2026. The memorandum of understanding sets out a 60-day ceasefire, the reopening of the Strait of Hormuz and a pathway to technical talks on Iran’s nuclear programme, which has kept the USD near Monday’s weekly low and, alongside the RBA’s guidance, supported the AUD. The RBA held its cash rate at 4.35% to gauge the effect of prior tightening but flagged further increases if inflation stays elevated, leaving traders cautious about chasing the recent pullback from 0.7275-0.7280, a near four-year high reached last month.
FOMC Decision and Event-Driven Volatility
We see the AUD/USD pair consolidating above 0.7050 as the market holds its breath for the Federal Reserve’s decision later today. The recent hawkish pause from the Reserve Bank of Australia provides a floor for the currency for now. However, the Fed’s new economic projections and dot plot will be the primary driver for the next major move.
Our view is that with the latest US CPI data for May coming in at a sticky 3.8%, the Fed has little room to signal any policy easing. We will be scrutinizing the new dot plot for any upward revision in the long-term rate outlook. Fed Chair Kevin Warsh’s first major press conference will likely emphasize a data-dependent, anti-inflationary stance.
Impact of Geopolitics and Australian Fundamentals
The recent US-Iran peace framework is a significant headwind for the US Dollar, reducing its safe-haven appeal. We have already seen this pressure oil prices, with WTI crude falling from over $95 to near $88 in the past week on news of the Strait of Hormuz reopening. This improved risk sentiment generally benefits commodity-linked currencies like the Australian Dollar.
In our assessment, the RBA’s warning of potential future hikes is credible, especially with Australia’s Q1 inflation still high at 4.5%. The tight labor market, confirmed by May’s steady 3.9% unemployment rate, gives the central bank justification to remain hawkish. This underlying strength in the Australian economy should limit any significant downside for the AUD/USD pair.
Given the binary nature of the FOMC event, we believe outright directional bets are risky. One-week implied volatility for AUD/USD has surged to 14.5%, indicating the market is pricing in a significant move in either direction. Therefore, purchasing options strategies like straddles or strangles could be an effective way to trade the expected price swing without betting on the direction.
We are viewing the current price action as a healthy correction from the nearly four-year peak near 0.7280 seen last month. This situation is reminiscent of periods in the 2022 tightening cycle, where central bank pauses did not signal an end to hikes but rather a temporary stop to assess economic data. A hawkish hold from the Fed could push the pair towards 0.6900, while a neutral stance could see a re-test of 0.7200.
