AUD/JPY has fallen to near 110.50, extending losses for the second consecutive day during Asian trading hours, as heightened risk aversion follows fresh Israeli strikes on Tehran [4]. The currency pair's weakness is attributed to escalating conflict in the Middle East, with Israel launching attacks on Iran despite US President Donald Trump signaling a pause in strikes on energy infrastructure after what he described as productive talks with Tehran. However, Iranian officials, including Foreign Minister Abbas Araghchi and Parliament Speaker Mohammad Bagher Ghalibaf, denied any engagement with Washington, and senior military adviser Mohsen Rezaei stated that the conflict would persist until Iran receives full compensation for the damage incurred [4][6].
The Japanese Yen remains under pressure due to softer inflation data, as Japan's National Consumer Price Index (CPI) rose 1.3% YoY in February, down from 1.5% previously, marking the lowest level since March 2022 and falling short of the central bank’s 2% target. Core inflation eased to 1.6% YoY from 2.0%, below the 1.7% consensus, while 'core-core' inflation edged down to 2.5% YoY from 2.6% [4]. In Australia, the S&P Global Flash Composite PMI dropped sharply to 47.0 in March from 52.4 in February, signaling a return to contraction after eighteen months. The Services PMI fell to 46.6 from 52.8, marking its first contraction in over two years, and the Manufacturing PMI edged down to 50.1 from 51.0 [4].
Market focus now shifts to Wednesday’s Australian inflation report, where trimmed mean CPI is expected to hold steady at 3.4% and headline inflation at 3.8% [4]. Interest rate hike expectations for the Reserve Bank of Australia (RBA) are running high, and a hotter inflation print could seal the deal for a May hike, with underlying metrics like services inflation already reflecting sticky price pressures [2]. Technical analysis suggests AUD/JPY is testing a confluence of support levels near the 61.8% Fibonacci retracement at 110.01 and the major psychological floor at 110.00. Reversal candlesticks at this region could point to a continuation of the rally toward the pivot point at 112.06 and swing high at 114.11, while a breakdown below these levels could trigger a longer-term selloff toward bearish targets at 108.86 and 107.70 [1].
The US Dollar Index (DXY) has regained positive traction, climbing to the 99.35 area, supported by global risk-aversion and fading hopes of Iran de-escalation. The USD was the strongest against the Australian Dollar, with a 0.55% gain today [5]. The CME Group's FedWatch Tool indicates minimal to no chance of a US rate cut by year-end, and rising US Treasury yields further support the Greenback [5]. Meanwhile, USD/CAD strengthened to around 1.3750 amid Middle East tensions, with crude oil prices soaring as traders reacted to Iran's denial of peace talks. The Bank of Canada left its key overnight rate unchanged at 2.25% in March, warning that the outlook is highly uncertain and that the Iran conflict has heightened risks to the global economy [6].
Analysts and traders are closely watching the upcoming Australian CPI release, as a strong print could reinforce RBA rate hike expectations and potentially trigger a bounce in AUD crosses such as AUD/CHF and AUD/CAD [2]. However, the prevailing risk-off sentiment and weak PMI data are weighing heavily on the Australian Dollar, and technical signals suggest AUD/JPY is at a critical inflection point [1][4].
CONCLUSION
AUD/JPY is under significant pressure due to Middle East tensions, weak Australian PMI data, and global risk-aversion, with the pair testing key support levels ahead of the Australian CPI release. Market participants are awaiting Wednesday's inflation report, which could determine the next directional move for AUD and influence RBA rate hike expectations. The risk-off environment and strong USD are likely to keep AUD subdued unless a robust CPI print shifts sentiment.