The Aussie Dollar’s uptrend seems to have met some decent resistance in the 0.7270-0.7280 band so far, with AUD/USD still looking for a strong catalyst to extend its rally and dispute the yearly peaks and higher levels. In the meantime, the pair’s constructive outlook remains unchallenged for now, reinforced by elevated domestic inflation and the RBA’s hawkish approach.
The Australian Dollar (AUD) starts the week on a positive footing, with AUD/USD managing to come close to the key 0.7200 hurdle following an early pullback to monthly troughs near 0.7120.
Indeed, the pair’s acceptable bounce comes on the back of a tepid correction in the US Dollar (USD) despite still unabated concerns on the geopolitical front and rising bets for a tighter-for-longer Federal Reserve (Fed).
Australia remains resilient, but signs of strain are emerging
The Australian economy does look healthy and stable altogether and, honestly, is in much better shape than many of its G10 peers.
This performance appears underpinned by a solid domestic demand and pretty decent figures when it comes to economic growth. The spectre of a sticky inflation seems to justify the cautious and data-dependent stance from the Reserve Bank of Australia (RBA), particularly following the latest meeting, where it raised rates to 4.35%, broadly in line with market expectations.
Supporting the above, the preliminary data from the Purchasing Managers’ Index (PMI) showed Manufacturing at 51.0 and Services at 50.3, both recovering and back to expansion territory in April. However, this bounce feels more like a slow grind higher than a meaningful pickup in activity… for now.
In the opposite direction, the latest trade balance figures showed an unexpected deficit of A$1.841 billion in March, markedly lower than the A$5.026 billion recorded in February. The Gross Domestic Product (GDP), meanwhile, showed the economy expanded by 0.8% QoQ and 2.6% YoY in late 2025.
On the not-so-bright side, the labour market seems to be somewhat cooling: the Unemployment Rate remained at 4.3% in March, and the Employment Change slowed sharply to 17.9K from close to 50K recorded in the previous month.
Back to the thorny inflation issue: the latest Consumer Price Index (CPI) came in at 4.1% YoY, with both the Trimmed Mean and Weighted Median running at 3.5% YoY. Following these prints, any real sense of disinflation now appears dim.
For the RBA, that means the job is far from done, as policymakers continue to signal that inflation may only return to target around mid-2028, keeping the focus firmly on patience rather than any imminent pivot.
China holds steady, but momentum is fading
China now looks more like a stabilising force than the tailwind it usually was for the Australian economy.
Let’s see some numbers: the economy expanded by 5.0% YoY in Q1, and Retail Sales gained 1.91% since the beginning of the year and a meagre 0.2% in a year to April. In addition, Industrial Production disappointed expectations in last month after expanding by 4.1% from a year earlier and 5.6% YTD.
Of note is the sharp reduction of the trade surplus, which narrowed to just over $51 billion in March from nearly $214 billion previously, all in response to weaker demand dynamics.
However, business activity seems to be regaining traction after the National Bureau of Statistics (NBS) reported Manufacturing PMI at 50.3 in April, while Services slipped into contraction territory at 49.4. At the same time, private gauges such as RatingDog still point to expansion, with Manufacturing climbing to 52.2 and Services up to 52.6.
The disinflationary pressure in China has been losing steam, as the CPI rose 1.2% YoY in April, while Producer Prices jumped by 2.8% YoY, moving further away from deflation.
And what about the People’s Bank of China (PBoC)? Investors largely anticipate the central bank to keep the Loan Prime Rates (LPR) unchanged at 3.00% for the one-year tenor and 3.50% for the five-year tenor at its event later in the week.
To sum up, China is no longer pushing growth higher, but it is not dragging it down aggressively either. It is simply keeping things steady.
The RBA is still fighting inflation, even as growth slows
The RBA matched consensus earlier in the month, lifting its Official Cash Rate (OCR) by 25 basis points to 4.35%. The statement read like a central bank dealing with a more complicated world: the outlook has clearly worsened, with growth marked down and inflation pushed higher, leaving policymakers facing a more uncomfortable trade-off.
Inflation is now expected to stay higher for longer, with the CPI only returning to target around 2027–2028. At the same time, the GDP is set to run below trend, and the jobless rate is seen gradually drifting higher.
A big part of that shift comes from the oil shock linked to the Middle East conflict. The bank sees it as a hit to growth but also a fresh source of inflation pressure, exactly the kind of mix central banks dislike. There are even references to possible energy shortages if the situation drags on.
For now, though, there is little sign that demand has rolled over in a meaningful way, and underlying inflation pressures remain firm, with businesses increasingly expected to pass on higher costs.
In her press conference, Governor Michele Bullock sounded a bit more measured. The key message is that rates are now in restrictive territory, which gives the RBA some breathing space.
In her words, the bank can now afford to “sit and see”, taking time to assess how the shock plays out rather than rushing into further moves. That in itself feels like a shift in tone.
Still, the door to more tightening is not closed. Bullock made it clear that if higher costs start feeding into inflation expectations, the RBA would have to respond, potentially with higher rates.
Bullock also framed the situation quite bluntly, describing the oil shock as something that reduces real incomes and “makes us poorer”, while warning that even a quick resolution would not prevent higher costs from lingering.
All in all
The central bank is still focused on inflation, but it sounds less eager to keep tightening aggressively. Rates are now seen as restrictive enough to pause if needed, although risks around energy and inflation expectations mean the job is not fully done yet.
In the meantime, markets expect the RBA to keep its OCR unchanged at its June 16 gathering, while pencilling in just over 38 basis points of extra tightening by year-end.
AUD/USD rallies, but the market still wants confirmation
Base case
The pair has managed to break above the key 0.7200 level before correcting, but it still feels heavily dependent on the broader backdrop. Without a sustained improvement in risk sentiment or continued US Dollar weakness, the move could start to lose traction.
Bull case
Further conviction is needed. If risk appetite picks up serious pace, spot could extend the uptrend and challenge the 2026 peak near 0.7280, just ahead of the minor 0.7300 barrier. Further up, the 2022 ceiling at 0.7593 awaits. Speculative positioning seems to be leaning toward this scenario.
Bear case
Some loss of momentum should not be ruled out in the current volatile context. If sentiment deteriorates, the Greenback picks up pace, or Chinese data disappoint, spot could slip back below the initial contention zone at 0.7100, opening the door to a deeper move at the same time.
The rally is there, although markets are still not fully convinced.
Speculative sentiment bolster the AUD
According to the latest Commodity Futures Trading Commission (CFTC) data, speculative net longs in the Australian Dollar increased to levels last seen in late January 2013 near 85K contracts for the week ending May 12.
The move also came in tandem with the fourth consecutive increase in open interest, this time approaching 290K contracts.
It is worth recalling that speculators’ sentiment toward the Aussie shifted in late January following several years of being net short.
Despite the ongoing corrective move in spot, which, it must be said, it largely follows US Dollar dynamics, the prospect remains constructive, leaving the door open to further gains in the short-term horizon.
What actually matters for the Aussie right now
In the near term, it is still all about the US Dollar, global risk sentiment, and geopolitics. Those remain the key drivers of price action. Next on tap in Oz will be the release of the RBA Minutes, where market participants will look into further details of the Board’s decision to hike rates by 25 basis points earlier in the month.
Key risks include a sharper slowdown in China, a more aggressive Federal Reserve (Fed), a change of heart from investors when it comes to risk sentiment, or any shift in the RBA’s stance. Any of these could quickly destabilise the Australian currency in the short-term horizon.
Technical Analysis
In the daily chart, AUD/USD trades at 0.7154, holding a broadly constructive bias as it consolidates above the 55-day, 100-day and 200-day simple moving averages (SMAs) clustered between roughly 0.71 and 0.68. The ability to stay over the nearby 55-day SMA at 0.7088 and the horizontal floor at 0.7102 suggests underlying demand, although the Relative Strength Index (RSI) around 49 and a subdued Average Directional Index (ADX) near 14 hint at fading momentum and a lack of strong trend conviction.
On the downside, immediate support is located at 0.7102, followed by the 55-day SMA at 0.7088 and then the 100-day SMA near 0.7008, while deeper protection is seen at 0.6833 and the 200-day SMA at 0.6784. On the topside, initial resistance is aligned at 0.7278, just ahead of the nearby barrier at 0.7283, with a break above these caps exposing the more distant resistance zone toward 0.7661.
(The technical analysis of this story was written with the help of an AI tool.)
Bottom line: the tone is improving, but doubts remain
The broader backdrop for the Australian Dollar remains supportive, and the RBA’s stance should continue to provide a degree of support on dips.
But this is still a currency that trades heavily on sentiment. When confidence is strong, the Aussie performs well. When uncertainty creeps in, the US Dollar tends to take over.
So while the medium-term story still leans constructive, the near-term outlook feels less certain. The move higher is there, but conviction is not quite there yet.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
