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) adds to Wednesday’s uptick, prompting AUD/USD to revisit once again the 0.7160 region and extending the bounce off recent lows near 0.7080.
That pair, in the meantime, advances for the second day in a row on the back of further improvement on the geopolitical scenario, where latest rumours point to a potential US-Iran deal brokered by Pakistan that could be announced shortly.
Australia still looks resilient, but the warning signs are growing louder
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 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 flash data from the May Purchasing Managers’ Index (PMI) showed Manufacturing at 50.2 (from 51.3) and Services at 47.7 (from 50.7).
In the same vein, 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 less positive side, the labour market has been cooling in 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).
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. The latest Consumer Inflation Expectations eased to 5.6% in May (from 5.9%), according to the Melbourne Institute.
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 steadying the ship, but no longer powering the region higher
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, 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 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)? 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 event earlier in the week, matching the broad consensus.
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.
Inflation remains the RBA’s biggest headache
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.
The RBA Minutes released early on Tuesday were a very hawkish read with most members still of the view that inflation was the greater danger even though there were signs that growth was slowing. Eight Board members felt the strongest case was for another 25 basis point rate hike, while only one preferred to wait for more data. There was also clear concern that core inflation could remain above target for too long, with some members warning that inflation expectations risk becoming de anchored if the Bank does not stay firm enough.
At the same time, the Board acknowledged that Australian economic growth is likely to stay below potential for a while and admitted monetary policy has limited ability to change the near term inflation path, especially with geopolitical tensions and higher energy prices linked to the Gulf conflict clouding the outlook. Some members even argued that another rate hike would give the RBA more time to assess how households and businesses are coping with the evolving backdrop
For markets, the broader message is that the RBA still looks a long way from turning dovish. Policymakers appear more worried about stubborn inflation than weaker growth, reinforcing the idea that interest rates may need to stay restrictive for longer. This should continue to lend some support to the Australian Dollar, particularly if inflation data to come remains sticky.
In the meantime, markets expect the RBA to keep its OCR unchanged at its June 16 gathering, while pencilling in roughly 37 basis points of extra tightening by year-end.
AUD/USD breaks higher, but markets are not fully buying the move yet
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
The loss of further momentum should not be ruled out in the current volatile context. If sentiment deteriorates, the Greenback picks up extra pace, or Chinese data keep disappointing, spot could recede further and dispute the key 0.7000 neighbourhood in the relatively short-term horizon.
The rally is there, although markets are still not fully convinced.
Speculators are still backing the Aussie story
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 could drive the next move in the Australian Dollar
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 inflation data for the month of April, scheduled for May 27.
Key risks include a sharper slowdown in China, a more aggressive 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 near term.
Technical Analysis:
In the daily chart, AUD/USD trades at 0.7165, holding a constructive bullish tone above its 55-day, 100-day and 200-day simple moving averages (SMAs) clustered between 0.70 and 0.71. The short‑term uptrend remains supported by this stacked moving-average base, while the Relative Strength Index around 51 and a low Average Directional Index near 16 suggest modest, rather than aggressive, directional momentum as the pair consolidates after recent gains.
On the downside, immediate support is seen at the horizontal level near 0.7102, reinforced by the 55-day SMA at 0.7093 and then the 100-day SMA at 0.7022, with deeper demand emerging around 0.6833 and the longer-term 200-day SMA at 0.6793. On the topside, initial resistance aligns with the 0.7283 barrier, ahead of a more distant hurdle at 0.7661, and a sustained break above 0.7283 would be needed to extend the current bullish phase toward higher medium-term objectives.
(The technical analysis of this story was written with the help of an AI tool.)
Bottom line: constructive outlook, fragile confidence
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.
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.
