By: Matt Simpson, Market Analyst
The Australian dollar delivered a strong performance in Q1, underpinned by RBA tightening and a widening yield advantage over the US. But the outlook for Q2 is becoming more complex.
Geopolitical tensions, elevated oil prices and shifting expectations for both the RBA and Fed are creating conflicting macro signals. While higher yields have supported the Aussie, they are increasingly being driven by inflation risks rather than growth strength—raising questions about how sustainable the rally really is.
With positioning stretched and seasonality pointing to a choppy quarter, AUD/USD may be vulnerable to near-term downside before any sustained bullish breakout can emerge.
The Australian dollar’s strong Q1 performance was largely driven by RBA tightening and a widening yield advantage over the US. But as we move into Q2, those drivers are becoming less straightforward.
Geopolitical tensions, particularly in the Middle East, are complicating the outlook for inflation and growth, while expectations for both the RBA and Fed are shifting. This leaves AUD/USD caught between supportive yield dynamics and growing macro headwinds—setting the stage for a potentially volatile and directionless quarter unless a clear catalyst emerges.
Geopolitics and Oil Risks Complicate the AUD/USD Outlook
The pattern so far has been familiar: the US signals progress on talks that Iran later claims never began. That has driven repeated swings in risk sentiment. Yet it already feels like markets have moved beyond the initial ‘shock and awe’ phase of the cycle. Not that the Australian dollar has taken much notice—it has remained largely rangebound, caught between negative risk-off flows and support from firmer commodities and expectations of further RBA tightening.
That said, the conflict in Iran is clearly complicating the outlook for the RBA. If tensions persist and the Strait of Hormuz remains disrupted, elevated oil prices could weigh on the global economy and add another layer of uncertainty for policymakers. In that scenario, higher energy prices could reinforce expectations for tighter monetary policy—particularly in the US—thereby supporting the US dollar and limiting upside for AUD/USD despite stronger commodities.
Source: TradingView
A sustained spike in oil prices would also pose downside risks to global growth, particularly in China—Australia’s largest trading partner—which could further weigh on the Australian dollar.
Conversely, any meaningful de-escalation could see oil prices retrace, easing inflation pressures and removing a key pillar of support for the US dollar. That in turn could allow AUD/USD to break higher, especially if RBA hike expectations are repriced.
On balance, the current geopolitical backdrop leans modestly supportive of the US dollar in the near term, increasing the risk of a downside break for AUD/USD before any sustained upside move.
That leaves domestic data and policy expectations as the next key drivers for AUD/USD.
With an unemployment rate at 4.3%, a participation rate of 67% and around 139k jobs added since December, the Australian economy is hardly on its knees. But that doesn’t mean there aren’t pockets of weakness. We’ve seen a steady stream of job-cut headlines from the financial and tech sectors, reflected in the 30.5k decline in full-time employment in February. Whether this broadens across other sectors will likely hinge on the trajectory of global growth, although any slowdown may not fully materialise until later in the year.
Inflation was slightly softer than expected in February, although trimmed mean CPI remained at 3.4%—above the RBA’s 2–3% target for a fourth consecutive month—while headline CPI held at 3.7%. That said, this may prove a temporary reprieve given the lagged impact of higher energy prices linked to Middle East tensions.
While growth has held up better than expected, business and consumer confidence are beginning to soften following the RBA’s recent tightening. The key question is whether this deterioration is enough to temper expectations for further hikes—and what that ultimately means for the Australian dollar.
Takeaway: The data points to a resilient but slowing economy, leaving the RBA caught between sticky inflation and softening growth — keeping the AUD/USD outlook finely balanced, with downside risks building.
RBA–Fed Policy Divergence Set to Widen?
The RBA’s February hike pushed the cash rate above the Fed’s for the first time in six years, and the follow-up move in March extended the yield differential to a nine-year high of around 35bp. The spread now looks set to widen further, although that does not necessarily imply AUD/USD will track it higher.
Assistant Governor Kent warned that persistent inflation—particularly if driven by energy—could force the RBA to tighten further to prevent inflation expectations from becoming unanchored. While rate hikes cannot offset the initial supply shock, they can limit second-round effects. RBA cash rate futures now imply around 66.5bp of tightening by December, equivalent to roughly two to three additional hikes.
However, these are not ‘happy hikes’. Policy is being tightened to anchor inflation expectations while households absorb higher energy costs, which could weigh on growth and sentiment. That dynamic raises the risk of a more bearish AUD outlook despite rising yields.
The Fed is also not in a position to cut rates any time soon, with money markets assigning around a 20–25% probability of a further hike into year-end. That should continue to underpin US yields.
Even so, the RBA’s recent hawkish shift may allow the AU–US rate differential to widen modestly further, although the net impact on AUD/USD is likely to be less straightforward given the drag from weaker growth and risk sentiment.
With macro and policy drivers becoming more conflicted, positioning and technicals may ultimately determine the next move for AUD/USD.
Source: LSEG
Key takeaway: Rising yield differentials may no longer translate into AUD/USD gains, as “unhappy hikes” risk weighing on growth and sentiment.
AUD/USD Technical Outlook: Positioning and Seasonality in Focus
The Australian dollar has rallied over 20% since its April low and is up 7.8% year-to-date. However, the advance has stalled around the 2023 high, with positioning arguably stretched by several metrics. This raises the risk of a pullback for AUD/USD in early Q2, particularly if the US dollar index breaks higher—as I suspect it will.
The main takeaway is that long exposure may be nearing a sentiment extreme, while there is little appetite to bet against AUD/USD. This suggests any pullback could be limited and driven more by a shakeout of longs than fresh shorting. If Middle East tensions ease, it could pave the way for a bullish breakout in the Australian dollar, particularly if RBA hike expectations are repriced higher.
Seasonality patterns also point to a less straightforward Q2.
Source: CME, CFTC (COT), LSEG
Seasonality should be taken with a pinch of salt, particularly given the rise in geopolitical risks and their potential impact on economies and central bank policies. Still, it provides a useful benchmark for what a typical month—or a strong or weak period—may look like at this time of year.
Data since 2000 shows that April tends to be the most bullish month of the year, with an average gain of 1.2%. Its median return is slightly lower at 0.9%, suggesting a handful of stronger months have lifted the average. The win rate of 64% is also respectable, while the 3.1% average gain during bullish Aprils is among the strongest of the year. Average losses for April have been around -2.1%.
May, however, tells a different story. It has negative average and median returns, alongside a relatively low win rate of 42.3%. Its average decline of -3.1% during negative months is also among the worst of the year.
June is more mixed. While its average and median returns are softer than April’s, it boasts one of the highest win rates of the year at around 53.9%.
Overall, Q2 tends to be a choppy period for AUD/USD, albeit with a modest bullish bias.
Source: LSEG
Overall, AUD/USD enters Q2 with conflicting drivers. While policy divergence may widen, growth risks and geopolitical uncertainty could limit upside. That leaves the pair vulnerable to near-term downside before any sustained bullish breakout can emerge.
This material should be construed as market commentary and represents the opinions and viewpoints of the author, and does not reflect tailored advice associated with any specific account.
The views are current only through the date stated and are subject to change at any time based upon market or other conditions, and StoneX Group Inc. (“SGI”) disclaims any responsibility to update such views. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. Past performance does not guarantee future results.
The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided.
References to certain OTC products or swaps are made on behalf of StoneX Markets, LLC (SXM), a member of the National Futures Association (NFA) and provisionally registered with the U.S. Commodity Futures Trading Commission (CFTC) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ and who have been accepted as customers of SXM.
StoneX Financial Inc. (SFI) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI is registered with the U.S. Securities and Exchange Commission (SEC) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Advisor. StoneX Financial (Canada) Inc. (SFCI) is registered in Canada and is a member of CIRO and CIPF. References to certain securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to certain exchange-traded futures and options are made on behalf of the FCM Division of SFI. Wealth Management is offered through SA Stone Wealth Management Inc., member FINRA/SIPC, and SA Stone Investment Advisors Inc., an SEC-registered investment advisor, both wholly owned subsidiaries of SGI.
R.J. O’Brien & Associates, LLC (RJO) is registered with the CFTC as a Futures Commission Merchant and is a member of NFA.
StoneX Financial Ltd (SFL) is registered in England and Wales, company no. 5616586. SFL is authorized and regulated by the Financial Conduct Authority (FCA) (registration number FRN:446717) to provide services to professional and eligible customers including: arrangement, execution and, where required, clearing derivative transactions in exchange traded futures and options. SFL is also authorized to engage in the arrangement and execution of transactions in certain OTC products, certain securities trading, precious metals trading and payment services to eligible customers. SFL is authorized and regulated by the FCA under the Payment Services Regulations 2017 for the provision of payment services. SFL is a category 1 ring-dealing member of the London Metal Exchange. In addition SFL also engages in other physically delivered commodities business and other general business activities which are unregulated and not required to be authorized by the FCA.
This communication is issued in the European Economic Area by StoneX Financial Europe GmbH (SFEG). StoneX is the trade name used by STONEX GROUP INC. and all its associated entities and subsidiaries. StoneX Financial Europe GmbH (“SFEG”) is a securities trading firm registered in Germany under Company No. HRB 80844.
StoneX APAC Pte. Ltd. (“SAP”) (Co. Reg. No 200616676W) is regulated as a Dealer (PS20190001002) under the Precious Stones and Precious Metals (Prevention of Money Laundering and Terrorism Financing) Act 2019 for purposes of anti-money laundering and countering the financing of terrorism. SAP is an “Approved International Trading Company” authorized to act as a “Spot Commodity Broker” under the Commodity Trading Act.
StoneX Financial Pte Ltd (Co. Reg. No 201130598R) (“SFP”) is regulated by the Monetary Authority of Singapore and is a Capital Markets Service Licence holder (for dealing in capital market products), an Exempt Financial Adviser (for advising on investment products and issuing or promulgating analyses/ reports on investment products) and a Major Payment Institution (for domestic and cross-border money transfer services).
SFP may distribute analysis/report produced by its respective foreign affiliates within the StoneX Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations Recipients should contact SFP at (65) 6309 1000 for any matters arising from, or in connection with, this webinar.
StoneX APAC Pte. Ltd. (“SAP”) (Co. Reg. No 200616676W) is regulated as a Dealer (PS20190001002) under the Precious Stones and Precious Metals (Prevention of Money Laundering and Terrorism Financing) Act 2019 for purposes of anti-money laundering and countering the financing of terrorism.
StoneX Financial (HK) Limited (CE No.: BCQ152) (“SHK”) is regulated by the Hong Kong Securities and Futures Commission for Dealing in Securities and Dealing in Futures Contracts.
StoneX Financial Pty Ltd (ACN 141 774 727) holds an Australian Financial Service License (AFSL: 345646) for Dealing in Securities, Exchange-Traded Derivatives Contracts, OTC Derivatives Contracts and Foreign Exchange Contracts, and is regulated by the Australian Securities and Investments Commission.
StoneX Securities Co., Ltd. (“SSJ”) (Co. Reg. No 010401047199) is regulated by the Japanese Financial Services Agency as a Type-I Financial Instruments Business Operator (Kanto Local Finance Bureau (FIBO)No.291’), is a member of the Financial Futures Association of Japan for dealing and broking FX and FX Option transactions, and is a member of the Japan Securities Dealers Association for dealing and broking stock indices and option transactions.
Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. Past performance of any futures or option is not indicative of future success. Indicators are not a trading system and are not published as a specific trade recommendation. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.
The report/analysis herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
© 2026 StoneX Group Inc. All Rights Reserved.
Our subscribers have access to comprehensive market analysis from StoneX spanning commodities, equities, currencies and more.
The Australian dollar enters Q3 with the market's focus shifting away from geopolitics and back towards monetary policy and economic data - what will that mean for AUD/USD in H2?
The balance of risks continues to favour USD/JPY upside, although the path higher is unlikely to be a straight line - read on for more details!
Crude oil prices have retraced sharply toward pre-war levels, falling more than 40% from their yearly highs - what does the second half of the year have in store?
Our market expertise, advanced platforms, global reach, culture of full transparency and commitment to our clients’ success all set us apart in the financial marketplace.
Reach
With access to 40+ derivatives exchanges, 180+ foreign exchange markets, nearly every global securities marketplace and numerous bi-lateral liquidity venues, StoneX’s digital network and deep relationships can take clients anywhere they want to go.
Transparency
As a publicly traded company meeting the highest standards of regulatory compliance in the markets we serve; our financials and record of accomplishment are matters of public record. StoneX’s commitment to “doing the right thing over the easy thing” sets us apart in the industry and helps us build respect, client trust and new partnerships.
Expertise
From our proprietary Market Intelligence platform, to “boots on the ground” expertise from award-winning traders and professionals, we connect our clients directly to actionable insights they can use to make more informed decisions and achieve their goals in the global markets.
