AUD/USD holds steady near recent highs ahead of expected RBA rate hike

AUD/USD trades around 0.7200 on Friday at the time of writing, virtually unchanged on the day and holding near recent highs, as markets adopt a wait-and-see approach ahead of the Reserve Bank of Australia (RBA) monetary policy decision scheduled for Tuesday.

The Australian Dollar (AUD) remains slightly supported against its major peers, with investors expecting this key event. According to a Reuters poll, a strong majority of economists expect a 25 basis point rate hike, which would bring the policy rate to 4.35%. These expectations are supported by persistent inflationary pressures in Australia, with the annual Consumer Price Index (CPI) coming in at 4.6% YoY in March, still well above the central bank’s target.

Market participants will also closely watch Governor Michele Bullock’s comments for further guidance on the policy outlook, particularly as energy-related risks linked to tensions in the Middle East and uncertainty surrounding the Strait of Hormuz could continue to fuel inflationary pressures.

At the same time, the US Dollar (USD) is struggling to gain traction despite a geopolitical backdrop that usually supports safe-haven demand. Markets expect the Federal Reserve (Fed) to keep interest rates unchanged through the end of the year, although some officials, including Neel Kashkari, have highlighted the possibility of further hikes in the event of a significant inflationary shock driven by energy prices.

Geopolitical tensions still provide intermittent support to the Greenback, particularly following reports that the US administration is considering military options regarding Iran. Meanwhile, diplomatic developments suggesting that Tehran has submitted a new proposal to the United States (US) on Thursday have temporarily weighed on the US Dollar.

Investors now turn their attention to the release of the US ISM Manufacturing Purchasing Managers Index (PMI) later in the day, a key indicator for assessing economic momentum.