The Aussie Dollar is still looking for a fresh catalyst to resume its upward trend, which began in late March and appears to have lost momentum ahead of the 0.7300 hurdle in early May. Meanwhile, dynamics around the US Dollar and geopolitics seem to have been too much for the Aussie, prompting a correction in AUD/USD to the area below the key 0.7000 contention zone. However, the AUD’s positive outlook remains unchanged, bolstered by still elevated inflation at home and the RBA’s cautious stance.
The Australian Dollar (AUD) manages to regain some composure on Thursday, prompting AUD/USD to set aside two daily pullbacks in a row and trade with humble gains in the low 0.7000s.
Indeed, the Australian currency is regaining some traction despite the firm tone of the US Dollar (USD), which keeps the broader risk complex under marked downside pressure as investors continue to digest Wednesday’s hawkish hold by the Federal Reserve (Fed) in what was Kevin Warsh’s first meeting as Chair.
In the meantime, the geopolitical factor remains at play after both the US and Iran signed an agreement. A 60-day negotiation period to reach a final deal now follows, while all the attention remains on the full reopening of the Strait of Hormuz.
Australia: Strong foundations, softer momentum
The Australian economy does look healthy and stable altogether and, honestly, 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 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 final data from the May Purchasing Managers’ Index (PMI) showed Manufacturing at 50.7 (from 51.3) and Services at 48.7 (from 50.7).
Adding some colour to the domestic fundamentals, the latest trade balance figures showed a A$1.791 billion surplus in April, reversing March’s A$1.024 billion deficit. The latest Gross Domestic Product (GDP) data, meanwhile, kind of disappointed expectations: the economy expanded by 0.3% QoQ in Q1 2026 (from 0.9%) and 2.5% YoY (from 2.5%), both prints missing consensus.
Still on the not-so-bright side, the labour market has cooled over the last couple of months. Indeed, the Unemployment Rate ticked higher to 4.5% in April (from 4.3%), and the Employment Change dropped by 18.6K individuals (from the revised 23.3K gain seen in the prior month).
Regarding inflation, April data saw the Consumer Price Index (CPI) come in at 4.2% from a year earlier (from 4.6%), the Trimmed Mean ticking higher to 3.4% (from 3.3%), and the Weighted Median holding steady at 3.5% over the last twelve months. The pace of disinflation remains weak, although the direction is still broadly correct. Somehow reinforcing that view, the latest Melbourne Institute’s Consumer Inflation Expectations eased to 5.5% in May (from 5.6%).
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 is no longer doing the heavy lifting
China now looks more like a stabilising force than the tailwind it usually provides for the Australian economy.
Let’s see some numbers: the economy expanded by 5.0% YoY in Q1, while Retail Sales unexpectedly contracted by 0.6% in the year to May. In addition, Industrial Production exceeded expectations last month after expanding by 4.5% from a year earlier.
Of note is the strong recovery of the trade balance, with May’s surplus widening to $105.43 billion from around $84.8 billion in the previous month and both imports and exports expanding markedly.
However, business activity seems to be regaining traction after the National Bureau of Statistics (NBS) reported Manufacturing PMI at 50 in May (from 50.3), while Services returned to the expansion territory at 50.1 (from 49.4). At the same time, private gauges such as RatingDog still point to expansion, with Manufacturing coming in at 51.8 and Services improving to 54.4.
The disinflationary trend in China seems to have re-emerged after the CPI disappointed expectations and rose by 1.2% in the year to May, matching the previous reading. On a monthly basis, prices dropped by 0.1%, while Producer Prices gained 3.9% over the last twelve months, also holding steady from April’s prints.
And what about the People’s Bank of China (PBoC)? The central bank kept the Loan Prime Rates (LPR) unchanged at 3.00% for the one-year tenor and 3.50% for the five-year tenor at its latest gathering, matching the broad consensus.
In summary, China is no longer pushing growth higher, but it is not dragging it down aggressively either. It is simply keeping things steady.
Patience remains the RBA’s guiding principle
As broadly awaited by market participants, the RBA left its Official Cash Rate (OCR) unchanged at 4.35% at its event early on Tuesday.
The Reserve Bank of Australia adopted a hawkish stance at its June meeting, reiterating that inflation remains too high and cautioning that more rate rises may yet be necessary if price pressures persist. Policymakers also noted continuing concerns from increased energy costs and underlined their commitment to preventing inflation from becoming entrenched.
That said, Governor Michele Bullock was a little more measured in tone at her press conference. She kept the option of additional tightening open but said the incoming data had generally progressed as expected and showed the Board did not need to tighten at this meeting. The economy is not entering a recession, and the employment market is still reasonably tight, she said.
The message in general was one of cautious tolerance. Inflation is still the bank’s biggest worry, but officials seem more satisfied with the progress made so far and prepared to let past rate rises have more time to work through the economy. Further tightening is feasible, but the bar for another rate rise appears higher than the phrase alone may lead one to expect.
Can the Aussie extend its recovery?
Base case
While above its key 200-day SMA around 0.6850, the pair’s outlook is expected to remain tilted to further advances. However, such a move needs a strong catalyst to emerge, and it feels heavily dependent on the broader backdrop: without a sustained improvement in risk sentiment or continued US Dollar weakness, the probability of extra gains could start to lose momentum.
Bull case
Further conviction is needed. If risk appetite picks up serious pace, spot could extend the uptrend and initially confront the 0.7200 hurdle before reaching 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 for now.
Bear case
In the current volatile context, we should not rule out the loss of further momentum. If sentiment deteriorates, the Greenback gains extra momentum, or Chinese data continue to disappoint, spot could recede further and revisit recent lows in the 0.6980 zone.
The recovery appears to be there, although markets are still not fully convinced.
Speculators are still backing the Aussie
According to the latest Commodity Futures Trading Commission (CFTC) data, speculative net longs in the Australian Dollar fell to around 18.2K contracts for the week ending on June 9, extending the recent reduction in bullish exposure. Positioning has notably deteriorated over the past month, with net longs down by nearly 67K contracts over the last four reporting weeks.
That unwinding, however, leaves speculative sentiment relatively high by historical standards. The current net long position still ranks in the 90th percentile of its 5-year range, while the speculative exposure stands at 6%, corresponding to the 89th percentile. This suggests that, although investors have been trimming bullish bets aggressively, positioning remains considerably more constructive than it has typically been over recent years.
Of note here is that the net percentile and speculative exposure percentile are telling the same story. When both are sitting around 90, there is confirmation that exposure remains historically elevated.
The calendar is about to get interesting
In the near term, the US Dollar, global risk sentiment, and geopolitics remain the main focus. Those remain the key drivers of price action. Next on tap on the Australian calendar will be the publication of preliminary Manufacturing and Services PMIs for the month of June, expected on June 23.
Key risks include a sharper slowdown in China, a more aggressive Fed, a change in investors’ risk sentiment, or any shift in the RBA’s stance. Any of these could quickly destabilise the Australian currency in the near term.
Technical analysis
In the daily chart, AUD/USD trades at 0.7020, keeping a bearish near-term tone as it holds below the 55-day and 100-day simple moving averages (SMAs) at 0.7128 and 0.7084, respectively, while clinging to a modest cushion above the 200-day SMA at 0.6850. The Relative Strength Index (RSI) at about 39 hints at lingering downside pressure, and the Average Directional Index (ADX) near 30 suggests a strengthening trend backdrop, reinforcing the notion that rallies are likely to face selling interest while price remains capped beneath the clustered medium-term averages.
On the topside, initial resistance emerges at the horizontal barrier around 0.7079, closely followed by the 100-day SMA at 0.7084 and then the 55-day SMA near 0.7128, forming a dense supply zone that bulls would need to clear to ease the current bearish bias; beyond that, 0.7278 and 0.7283 stand as subsequent hurdles ahead of the more distant 0.7661 level. On the downside, immediate focus falls on the broader support band anchored by the 200-day SMA at 0.6850 and the nearby horizontal floor at 0.6833, with deeper cushions seen at 0.6660 and 0.6593, while a break below these would expose the lower structural bases around 0.6414 and 0.6373.
(The technical analysis of this story was written with the help of an AI tool.)
A constructive story still looking for confirmation
The broader backdrop for the Australian Dollar remains constructive, and the RBA’s stance should continue to provide a degree of support on dips.
But the Australian Dollar is still a currency that trades heavily on sentiment. When confidence is strong, the Aussie performs well. When uncertainty creeps in, the Greenback 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.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
