AUD/JPY dips below 96.00, geopolitical optimism limits downside

• AUD/JPY may regain its ground amid positive signals of a potential Ukraine-Russia resolution.
• The AUD weakens as persistent consumer pessimism may necessitate further policy easing.
• The Japanese Yen gains support on expectations of a potential interest rate hike later this year.

AUD/JPY offers its recent gains from the previous session, trading around 95.80 during the European hours on Tuesday. The currency cross depreciates as the Australian Dollar (AUD) remains subdued despite an improved Westpac Consumer Confidence.

The reading climbed 5.7% in August to 98.5, following a 0.6% gain in July, marking its highest level since February 2022, as the Reserve Bank of Australia (RBA) has implemented a total of 75 basis points in rate cuts since January.

The AUD faces challenges, as Matthew Hassan, Head of Australian Macro-Forecasting, said the prolonged period of consumer pessimism may be coming to an end, although maintaining momentum could require additional easing. However, Hassan highlighted that policymakers are under no immediate pressure to deliver further cuts.

However, the downside of the risk-sensitive AUD/JPY cross could be limited amid easing risk sentiment, driven by positive signals toward a possible resolution of the Ukraine-Russia war. US President Donald Trump and Ukrainian President Volodymyr Zelenskyy both hoped that Monday's gathering would eventually lead to three-way talks with Russian President Vladimir Putin.

The Japanese Yen (JPY) finds support after the Bank of Japan (BoJ) raised its inflation forecast at the July meeting and signaled the possibility of an interest rate hike later this year. Adding to the momentum, Friday's data showed Japan's economy grew more than expected in the second quarter, driven largely by net exports despite US tariff headwinds, strengthening the case for a more hawkish policy stance.