• AUD/USD weakens as rising geopolitical tensions in the Middle East weigh on investor sentiment.
• Threats to key Oil shipping routes and the involvement of the Houthis increase fears of a broader escalation.
• Markets continue to assess the outlook for Australian interest rates ahead of the RBA’s minutes release.

AUD/USD trades around 0.6860 on Monday at the time of writing, down 0.21% on the day, as investors adopt a cautious stance amid escalating geopolitical tensions in the Middle East.

Market sentiment remains fragile after Iran-backed Houthi forces in Yemen joined the conflict between Israel and Iran. Over the weekend, the militants launched missiles toward Israel and threatened to close the Bab el-Mandeb Strait, a strategic shipping route for Middle Eastern Oil supplies. This new source of uncertainty has increased fears of a broader regional escalation and added volatility to financial markets.

In this environment of risk aversion, growth-sensitive currencies such as the Australian Dollar (AUD) tend to come under pressure, while investors shift toward assets perceived as safer. The conflict is also complicating the outlook for energy markets, with some analysts warning that Oil prices could rise further if maritime routes are disrupted.

On the political front, US President Donald Trump said on Monday that Washington is holding “serious discussions” with what he described as a new regime in Iran in an effort to end military operations. However, he also warned that the US could launch massive strikes against Iranian energy infrastructure if a deal is not reached quickly or if the Strait of Hormuz remains closed to commercial traffic.

Markets have reacted cautiously to these remarks. Iranian officials have expressed skepticism about the negotiations, accusing Washington of speaking about diplomacy while preparing the ground for a possible military invasion.

On the Australian side, investors are focusing on the upcoming release of the minutes from the latest Reserve Bank of Australia (RBA) meeting, scheduled for Tuesday. The central bank raised its key interest rate by 25 basis points at that meeting, bringing the cash rate to 4.1%. Traders will look for clues in the minutes about the policy outlook in the coming months.

According to the ASX’s RBA Rate Tracker, markets currently price in about a 69% chance of another rate hike at the May 5 meeting. Confirmation of this outlook could provide support to the Aussie, although geopolitical risks and shifts in global risk appetite remain key drivers for AUD/USD in the near term.