• AUD/USD advances after the announcement of an extension of the ceasefire between the US and Iran.
• Tensions in the Middle East remain elevated as the US naval blockade in the Strait of Hormuz continues.
• Expectations of further interest rate hikes from the RBA support the Australian Dollar against the Greenback.

AUD/USD trades in positive territory on Wednesday, around 0.7160 at the time of writing, up 0.12% on the day. The Australian Dollar (AUD) benefits from a modest improvement in market sentiment after US President Donald Trump announced the extension of the ceasefire with Iran, supporting risk-sensitive assets.

The US president stated that Washington is extending the military truce while awaiting a “unified proposal” from Tehran to resume negotiations. Despite the extension, tensions in the region remain elevated as the United States (US) continues to enforce a maritime blockade on Iranian vessels transiting the Strait of Hormuz, a strategic route for global Oil trade. Uncertainty also persists regarding Iran’s participation in a new round of negotiations, with some sources suggesting talks could take place as soon as Friday.

On the US Dollar (USD) side, comments from Federal Reserve (Fed) Chair nominee Kevin Warsh provide some support for the Greenback. During his Senate hearing, Warsh stressed the independence of monetary policy, stating that he had made no commitments to the White House regarding potential interest rate cuts.

However, monetary policy expectations remain a key driver for markets. A Reuters poll of economists suggests the Fed could keep its policy rate within the current 3.5%-3.75% range at least through September, amid persistent inflation pressures, although a majority of economists still expect at least one rate cut before the end of the year.

In Australia, expectations of tighter monetary policy provide additional support to the Australian Dollar. The Reserve Bank of Australia (RBA) recently warned that the surge in Oil prices linked to the Middle East war could push inflation toward 6%. In this context, markets now see nearly a 77% chance of a rate hike at the next meeting after Deputy Governor Andrew Hauser reiterated the central bank’s commitment to anchoring inflation.

Investors now turn their attention to economic activity indicators, with the release of the preliminary S&P Global Purchasing Managers Index (PMI) readings from both Australia and the United States, which could offer fresh clues on economic momentum in the two economies and shape short-term monetary policy expectations.