The Australian Dollar fell 0.36% on Thursday after US President Donald Trump said the conflict could last 2 to 3 weeks and would hit Iran harder. AUD/USD touched 0.6860 before moving back towards 0.6900.
Following the remarks, the US Dollar and US Treasury yields rose, while global equities fell. WTI crude rose more than 11% and traded above $111.00 per barrel.
Conflict Headlines Drive Risk Sentiment
Trump said the US does not need the Strait of Hormuz and called on allies to work towards reopening it. He also posted a video of a bridge blast in Iran on his Truth Social account and urged Iran to reach a deal.
US trade data showed the deficit widened 3.0% to $84.6 billion in February, with imports up 4.3% to $372.1 billion and exports up 4.2% to a record $314.8 billion. Initial jobless claims fell from 215K to 202K for the week ending 28 March, versus a 212K forecast, while Challenger job cuts were over 60K in March.
Atlanta Fed GDPNow for Q1 2026 fell from 1.9% to 1.6%. The DXY index rose 0.46% to 100.01.
Australia’s goods trade surplus more than doubled in February on higher gold and farm exports. Markets priced a 71% chance of an RBA rate rise on 5 May, and a path that could take rates to 4.6% in 2026, with cuts expected in 2027.
Geopolitical tensions are the primary driver, boosting the US Dollar as a safe haven and pressuring risk-sensitive currencies like the Australian dollar. Harsh rhetoric regarding Iran is causing sharp, unpredictable market swings. Traders should anticipate continued volatility and be cautious, as headline risk remains extremely high.
Oil Shock And Volatility Risks
The spike in oil prices is a clear sign of market fear, weighing heavily on global sentiment. WTI crude futures have been trading above $111, and we have seen reports this week of a larger-than-expected draw in US inventories, keeping prices supported. We saw a similar pattern during the initial flare-up of the Ukraine conflict in 2022, where energy markets reacted violently to fears of supply disruption.
Despite this global risk-off mood, we see the Reserve Bank of Australia sending hawkish signals to combat inflation. Australia’s quarterly CPI print from January 2026 came in at a stubborn 5.2%, reinforcing the RBA’s restrictive stance. As of this morning, interest rate futures are pricing in an 85% probability of a 25 basis point hike in May, providing a strong fundamental support for the Aussie dollar.
On the other side, the US economy is presenting a mixed picture, with strong labor market data contrasting with a downward revision in the Atlanta Fed’s GDPNow growth forecast. The upcoming Non-Farm Payrolls report, due out later today, will be a critical test for the US dollar’s strength. A weaker-than-expected number could undermine the greenback once the immediate safe-haven demand fades.
Given the current environment, buying AUD/USD put options is a prudent strategy to hedge against a further decline if Middle East tensions escalate. This allows for participation in downside moves below the key 0.6880 support level while clearly defining your maximum risk. We remember that during the US-Iran flare-up in early 2020, implied volatility remained elevated for several weeks before normalizing.
For traders looking beyond the immediate conflict, any sign of de-escalation could be a significant buying opportunity. The underlying divergence between a hawkish RBA and a potentially slowing US economy remains a bullish theme for the Aussie. Using bull call spreads to target a move back towards the 0.7080 resistance area would be a cost-effective way to position for a rebound.
