• AUD/USD declines on Thursday after hitting a multi-year high in the previous session.
• Rising geopolitical tensions in the Middle East support the US Dollar and weigh on risk-sensitive currencies.
• Expectations of a rate hike from the Reserve Bank of Australia could help limit downside for the Australian Dollar.

AUD/USD trades lower on Thursday at around 0.7095 at the time of writing, down 0.83% on the day, after reaching its highest level since June 2022 near 0.7185 on Wednesday. The pullback mainly reflects renewed demand for the US Dollar (USD) as investors turn more cautious.

Escalating tensions involving Iran, Israel and US forces continue to dominate market sentiment, increasing risk aversion across global markets. Concerns over potential disruptions to Oil shipments through the Strait of Hormuz have also pushed energy prices higher, reviving inflation fears. This environment supports US Treasury yields and strengthens the US Dollar, which typically benefits from its safe-haven status during periods of geopolitical uncertainty.

Recent US economic data also reinforces the Greenback. Initial Jobless Claims for the last week came in at 213K, below the 215K forecast, while Housing Starts rose to 1.487M, exceeding market expectations.

Despite the current pressure on the Australian Dollar (AUD), monetary policy expectations in Australia could provide some support. Several financial institutions, including ING and DBS, highlight that markets are increasingly pricing in a 25 basis-point rate hike by the Reserve Bank of Australia (RBA) at its March 17 meeting. According to ING, AUD/USD could even target the 0.7200 area if Equity markets remain resilient.

At the same time, TD Securities expects the RBA to deliver two rate hikes by May, potentially lifting the Cash Rate to 4.35%. This outlook reflects strong economic activity and persistent inflation risks in Australia. Such policy divergence could help limit losses in AUD/USD despite the current risk-off tone in global markets.