RBA to hold at 4.35% as AUD rides peace deal tailwind

The Australian dollar enters its biggest test of the week as the RBA and BOJ deliver back-to-back rate decisions that will determine the currency's near-term trajectory.

The Reserve Bank of Australia is set to hold its cash rate at 4.35% on Tuesday, but a hawkish tone could extend the Australian dollar's rally as traders weigh the BOJ's next move against easing geopolitical risk.

"The RBA will want to keep its tightening bias alive because inflation remains above target, but the growth slowdown gives them cover to pause," said Adam Boyton, head of Australian economics at ANZ.

The AUD/USD pair gained 0.5% on Monday after news of a preliminary US-Iran peace agreement boosted risk appetite, recovering from recent losses driven by expectations that the Federal Reserve will keep rates higher for longer. The S&P/ASX 200 index faces pressure if the RBA signals additional tightening, with rate-sensitive sectors such as real estate and consumer discretionary most exposed.

The stakes are high for the Australian dollar. If the RBA strikes a hawkish tone while the BOJ maintains its dovish stance, AUD/JPY could extend its rally toward 115. A surprise dovish tilt, however, would reverse Monday's gains and push EUR/AUD higher as risk appetite recedes.

Australia's economic backdrop gives the RBA room to hold. Inflation remains above the central bank's 2% to 3% target range, with Westpac forecasting trimmed mean inflation at 3.8% later this year. First-quarter GDP growth came in weaker than expected, unemployment is rising, and household spending has softened. The housing market also continues to show weakness, reinforcing the case for a pause.

The RBA has implemented three rate increases since early 2026, bringing the cash rate to its current level. Markets now watch for whether the post-meeting statement retains language that leaves the door open for further tightening. Westpac expects the central bank to deliver additional rate increases in August and September if inflation continues to exceed expectations. ANZ, meanwhile, sees rates unchanged through the rest of 2026 but acknowledges that stronger-than-expected second-quarter inflation data could force an August hike.

BOJ Decision Adds Cross-Asset Complexity

The Bank of Japan's policy decision later this week adds another layer for AUD pairs. If the BOJ holds rates steady or signals a slower normalization path, the yen could weaken further, providing additional upside for AUD/JPY. The pair has already rallied after the US-Iran peace deal, which reduced safe-haven demand for the yen.

The divergence between RBA hawkishness and BOJ dovishness creates a favorable backdrop for AUD/JPY bulls. Traders are watching the 115 level as a key resistance, with support at 113 offering a potential entry point for dip buyers.

What's at Stake for EUR/AUD

The euro faces its own headwinds. The European Central Bank has kept its July rate options open because of energy price risks from the Middle East conflict, but the region's economic stagnation limits the euro's upside. If the RBA delivers a hawkish hold and risk appetite remains strong, EUR/AUD could decline further as the Australian dollar outperforms.

This article is for informational purposes only and does not constitute investment advice.