AUD/USD Rises on Softer Oil and Risk-On Sentiment

Key Moments

Oil Retreat Fuels Dollar Pullback and Risk Appetite

The pullback in oil prices is supporting an improvement in risk sentiment this week, weighing on the dollar across major currency pairs. WTI crude, which surged to $119.50 yesterday, has since slumped to $87.10, marking a sharp reversal as market participants turn more upbeat on developments around the US-Iran conflict.

This shift follows what has been described as a roller coaster in the oil market, with traders now taking a more optimistic stance despite the absence of concrete progress on resolving energy supply risks in the Middle East. The durability of this optimism remains uncertain, as the broader impact of any ongoing or renewed disruptions could prompt another broad repricing across asset classes.

Improved Risk Tone Lifts Equities and the Australian Dollar

For the moment, markets are leaning into the more constructive mood. Oil is trading below the $90 mark, while equity futures are building on the prior session’s rebound. S&P 500 futures are up 0.3% after a softer start earlier, mirroring the modest improvement in risk appetite.

Against this backdrop, the dollar is weaker across the board, and the Australian dollar is outperforming in the major currency space. The risk-sensitive aussie is benefitting from the combination of softer oil, firmer equities, and shifting expectations around central bank policy.

AUD/USD Targets Key Resistance Area

On the AUD/USD daily chart, the pair is currently trading at 0.7103, a 0.4% rise on the session. Dip buyers have consistently defended daily closes above the 0.7000 level since last week, preserving the broader upward bias. A brief move lower early yesterday threatened to crack that psychological threshold, but the subsequent upswing in sentiment reversed the pressure and pushed the pair higher again.

The focus is now turning toward a possible retest of the August 2022 and January 2023 highs clustered in the 0.7135-0.7150 region. This area is seen as a critical resistance band on the charts and represents the next major technical hurdle before any further leg higher can unfold.

RBA Policy Outlook Back in Focus

While markets continue to monitor developments around the US-Iran conflict, attention is set to pivot back to monetary policy as a series of central bank decisions approaches next week. Within this context, the Reserve Bank of Australia holds particular relevance for the aussie.

The RBA has already been the first major central bank to shift back toward rate hikes in response to persistent inflation concerns. The earlier surge in oil prices had reinforced worries about renewed inflation pressures worldwide, potentially encouraging the RBA to accelerate its hawkish pivot if such pressures persist.

The central bank has already adopted a more hawkish tone in February, but the question now is whether consecutive rate hikes would represent excessive tightening for the domestic economy. At present, markets are assigning approximately 35% odds to a rate hike at next week’s meeting. Looking further out, pricing implies about 61 bps of additional tightening over the remainder of the year.

Aussie Positioned to Benefit from Policy Divergence

As risk sentiment improves and focus eventually shifts away from Middle East tensions, the Australian dollar appears well placed to take advantage of a supportive policy backdrop. The prospect of the RBA maintaining a relatively tighter stance compared with some peers provides a strong case for sustained policy divergence working in favor of AUD/USD.

If the current risk-on tone persists and the pair can overcome the 0.7135-0.7150 resistance zone, the aussie would be positioned to extend its advance, with RBA expectations continuing to act as a key driver alongside global risk conditions and developments in the oil market.