• AUD/USD remains subdued despite a rate hike in Australia in line with expectations.
• The cautious tone from the RBA limits the bullish impact of its decision.
• Safe-haven demand supports the US Dollar amid rising geopolitical tensions.

AUD/USD trades around 0.7170 on Tuesday, remaining slightly on the back foot for a second consecutive day despite the monetary policy decision from the Reserve Bank of Australia (RBA). The central bank raised its key rate by 25 basis points to 4.35%, a move widely expected by markets but one that failed to provide lasting support to the Australian Dollar (AUD).

The RBA highlighted a notable increase in inflation in the second half of 2025, partly driven by capacity constraints and by rising energy prices linked to tensions in the Middle East. The institution also pointed to higher short-term inflation expectations, while firms continue to pass rising costs on to consumers. However, the tone adopted by RBA Governor Michele Bullock remained cautious, describing the current monetary stance as somewhat restrictive and leaving the door open to a wait-and-see approach.

Several financial institutions believe a pause could follow this hike. Analysts at TD Securities argue that the central bank’s dovish remarks are capping upside potential for the Aussie, noting that a sustained move above 0.72 would likely require broader weakness in the US Dollar (USD). Meanwhile, Commerzbank analysts highlight that stagflation risks, driven by weaker growth and higher energy prices, represent a negative factor for the AUD.

At the same time, the US Dollar strengthens slightly, supported by a rise in risk aversion across financial markets. Geopolitical tensions intensify following drone and missile attacks attributed to Iran against the United Arab Emirates (UAE), boosting demand for safe-haven assets. This dynamic benefits the Greenback and weighs mechanically on the AUD/USD pair.

The US Dollar is also supported by rising US Treasury yields and expectations of a potentially more restrictive monetary policy from the Federal Reserve (Fed). Minneapolis Fed President Neel Kashkari indicated that additional rate hikes cannot be ruled out, particularly in a context of persistent inflationary pressures linked to higher energy prices.

Finally, Australia’s economic outlook remains clouded by global uncertainty. The RBA revises down its growth forecasts and expects the Middle East conflict to weigh on economic activity, further limiting the Australian Dollar’s appeal in the near term.