The Australian dollar strengthened more than 1% against the US dollar, trading at 70.84 cents ahead of the Reserve Bank of Australia's Tuesday meeting. Investors bet on another interest rate increase, positioning the central bank as a global outlier as inflation remains outside its target band despite February's 25 basis points hike to 3.85 per cent.

Rising Middle East tensions driving fuel prices higher have sparked concerns about imported inflation hitting Australia's economy. The country's reliance on fertilizer and fuel imports has economists predicting two more 25 basis points increases by May. While other major central banks are expected to hold rates this week, the RBA faces the delicate task of taming inflation without triggering a recession.

HSBC's Paul Bloxham warns the RBA may need to make the case for an economic downturn to control inflation. Commonwealth Bank of Australia traders note the rate increase isn't fully priced in, with the currency's rise driven by "risk sentiment." Senior economist Kristina Clifton expects the RBA's communication to be more hawkish than its global counterparts, as Australian inflation was already elevated before energy prices increased.