AUD/USD Slides as Ongoing Conflict Shifts Rate ExpectationsAUD/USDTASTYFX:AUDUSDtastyfxAUD/USD fell nearly 1% through afternoon trading on Thursday, March 5, as a risk-off tone due to escalating tensions in the Middle East hammered market sentiment. The Australian Dollar is a risk-sensitive currency and is reflecting the war’s economic consequences, which are pushing traders toward liquidity that is ultimately found in the U.S. dollar. Wednesday’s price action saw a bounce in the Aussie Dollar, as there were hopes that the Strait of Hormuz would only see temporary disruptions to oil flows. However, those hopes were quickly dashed with the conflict now expected to drag on for many weeks if not longer. Since the start of the week, AUD/USD is down 1.5%, although the currency pair is nearly 1% higher from its weekly swing low. The performance marks the first weekly drop in over six weeks. The Australian dollar has strengthened steadily since the start of the year, at least until this week, largely because of a widening gap in monetary policy. The Reserve Bank of Australia was the first major central bank to raise interest rates this year. RBA policymakers also signaled that more rate hikes were likely this year, and the implied rates from bond futures were pricing in at least two more 25 basis point hikes. At the same time, traders were pricing in at least two rate cuts from the Federal Reserve. The war in the Middle East has changed those outlooks, especially regarding the Federal Reserve. A surge in crude oil prices is raising inflation expectations. That makes it harder for the Fed to cut rates. At the same time, higher energy prices for Australia have the potential to slow demand in the economy, which could also impact the outlook for rate hikes from the RBA. That said, the longer the war goes on, the more potential that high energy prices have on Fed rate cut bets. Fewer Fed rate cut bets lessens the policy divergence risk between the currencies, which should pressure the Aussie going forward. AUD/USD broke below its 21-day exponential moving average (EMA) this week, which has supported prices since January. The 35-day EMA appears to be providing some support, along with the psychologically important 0.7000 handle, but bears are firmly in control this week, and it may just be a matter of time until those levels break. If so, there is some possible support that could be found from the late January to early February period when traders defended prices near 0.6940, a level that offered intraday support earlier this week.