The Aussie Dollar seems to have embarked on a consolidative phase, lifting AUD/USD to the vicinity of its yearly peaks well north of 0.7100 the figure. For now, the pair’s constructive tone should remain unchanged, reinforced by elevated domestic inflation and the RBA’s cautious bias
The Australian Dollar (AUD) adds to Friday’s small losses and drags AUD/USD to the area of two-day lows near 0.7150 in quite a negative start to the week.
Indeed, spot retreats for the second day in a row on the back of the US Dollar’s (USD) constructive tone, always underpinned by escalating concerns in the Middle East, which in turn keep the safe haven demand well in place.
That said, the US Dollar Index (DXY) extends its bounce off recent lows, regaining the 98.50 zone, also helped by the marked rebound in US Treasury yields across the curve.
Australia is holding up, but the cracks are starting to show
Australia’s economy is still in decent shape, supported by solid domestic demand, but the sense now is that momentum is beginning to fade around the edges.
The broader story hasn’t really changed. Growth is still holding up better than in many peer economies, inflation remains sticky in key areas, and the Reserve Bank of Australia (RBA) is sticking to its cautious, data-dependent stance after an already aggressive tightening cycle.
But the latest data suggests things are no longer accelerating. April’s preliminary Purchasing Managers’ Index (PMI) figures showed Manufacturing at 51.0 and Services at 50.3, both still in expansion territory, but only just. It feels more like a slow grind higher than a meaningful pickup in activity.
There are still areas of strength. The trade surplus widened to A$5.686 billion in February, the strongest reading since mid-2025, while Gross Domestic Product (GDP) growth held firm at 0.8% QoQ and 2.6% YoY.
Even so, the labour market is starting to cool at the margin. The Unemployment Rate held steady at 4.3% in March, but Employment Change slowed sharply to 17.9K from close to 50K previously. It is still a healthy print, just not as punchy as before.
Inflation remains the sticking point. 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. Any real sense of disinflation seems to have stalled in recent months.
For the RBA, that means the job is not done yet. Officials continue to signal that inflation may only return to target around mid-2028, which keeps the focus firmly on patience rather than any imminent pivot.
China is steady, but no longer driving the story
China is no longer providing the same tailwind it once did for Australia. Instead of acting as a growth engine, it now looks more like a stabilising force.
Growth is still respectable on paper, with the economy expanding by 5.0% YoY in the first quarter. Retail Sales are also ticking higher, up 2.43% annually since the start of the year and 1.7% YoY. But the momentum behind those numbers feels softer than in previous cycles.
That softer tone is particularly visible externally. The trade surplus narrowed sharply in March to just over $51 billion from nearly $214 billion previously, a sizeable drop that points to weaker demand dynamics.
Surveys tell a similar story. 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 improving to 52.2.
Inflation adds to this “middle ground” narrative. The CPI rose 1.0% YoY in March, while Producer Prices increased by 0.5% YoY, moving out of deflation but not pointing to any strong pricing pressure either.
Against that backdrop, the People’s Bank of China (PBoC) is staying put. Loan Prime Rates (LPR) were left unchanged at 3.00% for the one-year tenor and 3.50% for the five-year tenor in April.
All in, 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 hawkish, but the timing debate is heating up
The RBA’s latest decision captured just how finely balanced things have become. A narrow 5 to 4 vote delivered a 25 basis points hike, taking the Official Cash Rate (OCR) to 4.10% and highlighting a clear split within the board.
Despite that division, the broader message remains consistent. Capacity constraints are still an issue; higher oil prices are likely to keep near-term inflation pressures elevated, and demand is running stronger than the central bank would ideally like.
Where the shift is becoming more visible is around timing. Some policymakers are starting to lean towards a pause, arguing that it may be worth reassessing the outlook given the uncertain global backdrop and the lagged impact of previous rate increases.
That more cautious tone also came through in the Minutes, which emphasised how difficult the outlook has become to read, particularly with geopolitics adding another layer of uncertainty.
For now, markets are still leaning towards further tightening, pricing in around an 82% chance of a 25 basis points move on Tuesday and roughly 60 basis points of additional tightening by year-end.
AUD/USD: the move higher is real, but conviction is still missing
Base case: The pair has managed to break above the 0.7100 level, 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, the pair could attempt a challenge to the YTD tops near 0.7200, reinforcing the constructive narrative.
Bear case: Some loss of momentum should not be ruled out. If sentiment deteriorates, the US Dollar strengthens, or Chinese data disappoints, the pair could slip back below 0.7000, opening the door to a deeper move towards 0.6900.
The rally is there, but it still feels fragile. For now, markets are not fully convinced.
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 three forces continue to drive the price action.
The immediate focus now turns to the upcoming RBA meeting, where markets are leaning towards further tightening, even if the debate within the board is becoming more intense.
Key risks include a sharper slowdown in China, a more aggressive Federal Reserve (Fed), or any shift in the RBA’s stance. Any of these could quickly destabilise the Australian Dollar.
Technical Analysis:
In the daily chart, AUD/USD trades at 0.7169, maintaining a constructive bullish bias as it holds above the 55-day simple moving average (SMA) at 0.7064 and the 100-day SMA at 0.6953, while the longer-term 200-day SMA at 0.6747 underpins the broader uptrend. The pair is approaching a key cluster of overhead supply, with the 0.0% Fibonacci retracement of the latest cycle acting as immediate resistance at 0.7188, as the daily Relative Strength Index around 57 stays in positive territory and the weak Average Directional Index near 15 hints at a still-fragile trend.
On the topside, a decisive break above the 0.0% Fibonacci retracement at 0.7188 would open the door toward the next resistance at 0.7283, ahead of the more distant horizontal barrier at 0.7661. On the downside, initial support is seen at the 55-day SMA near 0.7064, followed by the 23.6% Fibonacci retracement at 0.7007 and the 100-day SMA at 0.6953, with additional Fibonacci and horizontal supports layered lower around 0.6895 and 0.6833, keeping the broader bullish structure intact while above the 200-day SMA at 0.6747.
(The technical analysis of this story was written with the help of an AI tool.)
Bottom line: constructive, but not fully convincing
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.
