AUD Slides as Iran Sanctions Weigh on Risk Appetite; RBA Minutes in Focus

The Australian dollar opened the week under pressure, trading near 0.71496. The US Treasury announced new sanctions on entities linked to Iran, deteriorating market risk appetite and dragging the risk-sensitive Aussie lower. Earlier, AUD/USD was at 0.7159 at the time of writing, down 0.28% on the day.

**Geopolitical Risk Dominates Short-Term Sentiment**

US sanctions against Iran heightened market concerns over Middle East tensions, prompting investors to rotate into safe-haven assets like the US dollar. This risk-off sentiment is the primary driver of the Aussie's intraday weakness. Meanwhile, markets are also assessing the potential impact of the Iran conflict on global energy markets and inflation outlooks, keeping traders cautious ahead of the RBA meeting minutes.

**Meeting Minutes in Focus**

Investors are closely watching the RBA's latest meeting minutes due Tuesday. At its May policy meeting, the Reserve Bank of Australia raised the key rate by 25 basis points to 4.35%. Market reports suggest that, according to the minutes, the central bank viewed the hike as reinforcing confidence in returning core inflation to 2.5%, while also providing room to observe the effects of the Iran war. The minutes also revealed that among the nine members, eight saw a stronger case for a rate hike, as inflation risks had risen amid the ongoing Middle East conflict. Markets will scrutinize the minutes to gauge the central bank's considerations for the policy path in coming months, especially against the backdrop of intertwined inflation risks and geopolitical uncertainty.

**Rate Hike Expectations Provide Underlying Support**

Despite near-term pressure on the Aussie, expectations of further RBA hikes may limit its downside. Reports show interest rate futures imply an 75% probability that the RBA will hike again in August, pushing the benchmark rate to 4.6% and peaking. However, some market participants anticipate another hike after August. This hawkish outlook echoes the Aussie's earlier rally to multi-year highs on rate-hike prospects, suggesting that yield differentials continue to underpin the currency in the medium term.