Sticky domestic inflation, combined with a Reserve Bank of Australia (RBA) that shows little sign of softening its hawkish stance, continues to provide an underlying cushion for the Australian Dollar (AUD). This backdrop helps keep the door open for further upside in AUD/USD while limiting downside risks. That said, persistent geopolitical tensions are likely to cap rallies for the time being.
The Australian Dollar extends Monday’s optimism, lifting AUD/USD to fresh more-than two-year highs just above 0.7150 on turnaround Tuesday, advancing at the same time for the third consecutive day.
The continuation of the recovery in spot comes amid fresh selling interest hurting the US Dollar (USD), in a context where market participants continue to speculate on the duration and eventual impacts of the crisis in the Middle East.
Australia: Resilient fundamentals
Australia’s macro backdrop continues to provide a firm floor for the Australian currency.
Growth remains respectable, inflation is proving sticky, and the Reserve Bank of Australia (RBA) is still leaning hawkish. For currency markets, that combination continues to place a meaningful floor under the Aussie.
February’s final Purchasing Managers’ Index (PMI) readings reinforced that view. Manufacturing printed at 51.0 and Services at 52.2, both comfortably in expansion territory and consistent with an economy that is still growing at a steady pace.
Consumer activity is also holding up better than many had anticipated. Retail spending has remained resilient, while the trade surplus reached A$2.631 billion in January.
The broader economy continues to expand at a healthy rhythm. Gross Domestic Product (GDP) grew 0.8% QoQ in the fourth quarter, or 2.6% YoY, comfortably above the central bank’s earlier projections.
The labour market is gradually losing a bit of momentum, but it is far from cracking. Employment Change increased by 17.8K in January and the Unemployment Rate held steady at 4.1%. In other words, the cooling process still looks orderly rather than abrupt, with no clear signs of stress emerging.
Inflation: easing, but stubborn
Inflation remains the central challenge.
January’s headline Consumer Price Index (CPI) held at 3.8% YoY, slightly above expectations, while the Trimmed Mean CPI edged up to 3.4% YoY. The overall direction remains downward, but the pace of disinflation is proving slower than policymakers would ideally prefer.
From the RBA’s perspective, the job is not finished yet. The central bank still expects inflation to peak around Q2 2026 before gradually drifting back toward the midpoint of the 2–3% target band by mid-2028.
Credit data also suggest that policy is restrictive, although not restrictive enough to significantly dampen demand. Home Loans increased by 10.6% QoQ in Q4, while Investment Lending rose by 7.9%. Parts of the housing and credit cycle therefore remain surprisingly active.
In short, inflation is easing, but the process remains uneven.
China: stabiliser rather than growth engine
China’s role in Australia’s outlook has also evolved.
Rather than acting as a powerful locomotive for global growth, the Chinese economy currently looks more like a stabilising force.
The growth picture still seems rather good at first sight. In the last quarter of 2025, the Gross Domestic Product (GDP) grew by 4.5% compared to the same time the year before. In December, Retail Sales expanded by 0.9% YoY. The trade numbers were also good after the surplus grew to $213.62 billion in the January-February period, with exports up 21.8% and imports up 19.8%.
Surveys regarding the performance of business activity, however, paint a slightly more nuanced picture, as the official Purchasing Managers’ Index (PMI) readings from the National Bureau of Statistics (NBS) remained in contraction territory in February: Manufacturing slipped to 49.0 from 49.3, while Services printed 49.5.
Furthermore, private surveys appear considerably stronger after the RatingDog indicators remained firmly in expansion territory in February, with Manufacturing at 52.1 and Services at 56.7, both up modestly from the previous month.
Meanwhile, inflation pressures remain subdued after the Consumer Price Index (CPI) ran at just 0.2% YoY, while the Producer Price Index (PPI) remained in deflation at -1.4% YoY. Meanwhile, the People’s Bank of China (PBoC) kept the one-year and five-year Loan Prime Rate (LPR) unchanged at 3.00% and 3.50%.
For the Australian Dollar, the takeaway is relatively straightforward. China is no longer acting as a major drag, but it is not yet providing a powerful growth impulse either.
RBA remains restrictive and patient
So far, the RBA remains almost exclusively focused on inflation data.
Indeed, the bank recently hiked the Official Cash Rate (OCR) to 3.85%, reinforcing that policymakers are not yet ready to declare victory over price pressures.
Governor Michelle Bullock noted earlier this week that financial markets have remained orderly despite rising tensions in the Middle East. For Australia, the implications are mixed. As a net energy exporter, higher commodity prices can support national income, although a prolonged geopolitical shock could still weigh on household consumption.
Bullock also reiterated that inflation remains elevated and that the Board’s priority is to keep inflation expectations firmly anchored. Policymakers will therefore continue to assess incoming data carefully, with every meeting effectively remaining live.
She also acknowledged that if labour market tightness persists, the unemployment rate may need to rise somewhat in order to help bring inflation back under control.
Markets currently price roughly 60 basis points of additional tightening this year. That is hardly an aggressive path, but it is sufficient to maintain a meaningful yield floor under the Australian Dollar.
Positioning: bullish exposure continues to build
The latest Commodity Futures Trading Commission (CFTC) data for the week ending March 3 show speculative traders extending their bullish exposure to the Aussie.
Non-commercial net long positions increased to around 67.8K contracts from 52.6K the previous week, marking a fresh multi-year high. The rise suggests institutional investors continue to lean into the trade rather than trimming exposure after the recent rally.
Market participation also increased. Open interest rose to roughly 262.3K contracts, indicating that the increase in net longs likely reflects fresh positioning entering the market rather than simple short covering.
All in all, speculative sentiment remains clearly constructive.
In fact, since net longs are near multi-year highs, the market may become more sensitive to changes in the macro story. This is because crowded trades tend to respond fast when the story changes.
What’s ahead for AUD/USD?
Near term: spot will probably keep getting its signals from events happening in the Greenback’s galaxy and the state of geopolitics. Strong US data, changes in tariffs, or more tensions in the Middle East may swiftly change the story in the market.
Risks: The AUD is still a typical high-beta currency, and it is likely to lose value if global risk appetite falls, China stays the same, or people alter their minds about the US Dollar.
Technical corner
In the daily chart, AUD/USD trades at 0.7140. The near-term bias is bullish as spot extends above the 23.6% Fibonacci retracement at 0.6976, measured from the 0.6421 low to the 0.7147 high, and approaches the swing high region. Price holds well above the rising 55-, 100- and 200-day Simple Moving Averages (SMAs), which cluster between 0.6640 and 0.6910 and reinforce an established uptrend. The Relative Strength Index (RSI) at 61.8 stays in positive territory without overbought stress, while the fading Average Directional Index (ADX) around 28 suggests the existing bullish phase is losing some directional intensity but remains in control.
Immediate resistance emerges at the 0.7147 Fibonacci high, ahead of the horizontal barrier at 0.7158, with a break exposing the next resistance at 0.7283 and, beyond that, 0.7661. On the downside, initial support stands at the 23.6% retracement at 0.6976, aligned with horizontal support at 0.6897. Below there, further pullbacks would look to the 0.6660 and 0.6593 supports near the underlying SMAs, while 0.6414 and 0.6373 mark a deeper demand band that would need to hold to preserve the broader bullish structure.
(The technical analysis of this story was written with the help of an AI tool.)
Bottom line: cautiously constructive
Healthy fundamentals at home and a hawkish RBA should keep the broader bias for spot constructive for the time being.
That said, confidence remains conditional. The AUD typically performs best when global risk sentiment improves. In case geopolitical tensions intensify or volatility gathers steam, the Greenback could quickly regain the upper hand and thus hurt the sentiment around the pair.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
