• AUD/USD trades around 0.7080, down on the day despite supportive domestic fundamentals.
• The Federal Reserve holds rates steady amid elevated uncertainty tied to the Middle East war.
• The Australian Dollar remains supported by expectations of further rate hikes in Australia.

AUD/USD trades around 0.7080 on Wednesday, down 0.34% on the day, despite a broadly supportive domestic backdrop for the Australian Dollar.

The Australian Dollar (AUD) continues to draw support from the hawkish stance of the Reserve Bank of Australia (RBA), which raised its policy rate by 25 basis points to 4.1% at its latest meeting. Governor Michele Bullock highlighted upside risks to inflation, particularly as geopolitical tensions in the Middle East drive energy prices higher. Australia’s Treasurer also warned that the conflict involving Iran could further fuel domestic inflation pressures.

Markets interpret the RBA’s communication as clearly hawkish, with internal divisions reflecting differences in timing rather than in the policy path itself. Several institutions now expect another rate hike in the coming months, reinforcing the AUD’s relative strength, especially against other risk-sensitive currencies.

However, the pair’s upside remains capped by the stance of the Federal Reserve (Fed). The US central bank kept its policy rate unchanged within the 3.50%-3.75% range, in line with expectations. The Federal Open Market Committee (FOMC) emphasized that uncertainty around the economic outlook remains elevated, particularly due to geopolitical developments and their inflationary impact.

Fed Chair Jerome Powell is expected to provide further clarity on how the Middle East conflict and rising Oil prices could influence the policy outlook. Despite inflation remaining above target, updated projections still point to a gradual easing path, with markets pricing in one rate cut this year.

In this context, the US Dollar (USD) remains relatively firm, as reflected by the US Dollar Index (DXY), which trades around 99.80. This resilience limits the near-term upside potential for AUD/USD, even as Australian fundamentals remain comparatively stronger.