AUD/JPY trades above 111.50 after paring recent losses

AUD/JPY remains in the negative territory, trading around 111.70 during the Asian hours on Monday. The currency cross struggles as the Australian Dollar (AUD) comes under pressure from escalating geopolitical tensions that continue to weigh on overall market sentiment.

Risk aversion strengthened as tensions in the Middle East persisted after US President Donald Trump issued Iran a 48-hour ultimatum to reopen the Strait of Hormuz to shipping or face potential destruction of its energy infrastructure.

In response, Iran’s Islamic Revolutionary Guard Corps (IRGC) warned that it would fully shut the strait if the US follows through on its threats. At the same time, the Jerusalem Post reported that Washington is considering a possible ground operation to seize Iran’s Kharg Island, a key oil export hub.

Investors are now focused on Wednesday’s Australian inflation report, where headline inflation is expected to remain steady at 3.8% YoY in February. The data comes after the Reserve Bank of Australia (RBA) delivered a narrowly split decision to raise the cash rate to 4.1%, marking back-to-back hikes for the first time since mid-2023 and reversing part of last year’s easing cycle, as policymakers attempt to rein in persistent inflationary pressures.

The AUD/JPY cross could extend its downside as the Japanese Yen (JPY) may strengthen, supported by rising oil prices that continue to fuel inflation concerns and reinforce a hawkish stance among major central banks. While the Bank of Japan kept interest rates unchanged last week, it signaled readiness to tighten policy further if needed.

Moreover, the JPY may also gain traction against its peers on growing speculation that Japanese authorities could step into the forex market to curb excessive currency moves.