AUD/USD eased to about 0.7160 in early Asian trade on Monday as US inflation data underpinned the US Dollar, with attention turning to the Federal Reserve’s interest rate decision on Wednesday. Headline CPI rose 0.4% month on month in August and 3.4% year on year, matching consensus, while core CPI increased 0.3% on the month versus 0.2% expected and slowed to 2.4% annually from 2.5% in July. Earlier PPI components were firm, and markets lifted implied odds of a quarter-point Fed hike to 86.2% from 72%, according to CME FedWatch. The Reserve Bank of Australia may temper losses after Assistant Governor Sarah Hunter said rates could rise again if inflation proves more persistent.
UOB pointed to a turn lower in the pair, referencing a move from 0.7205 last Friday to a 0.7238 high before a 0.83% drop to 0.7157, and flagged a potential decline towards 0.7120 unless 0.7210 gives way. On the charts, the pair remains above the 100-day moving average and near the lower Bollinger Band, while the 14-day RSI reads 54; resistance sits around 0.7170 then 0.7235, with support near 0.7100 and the 100-day MA at 0.7080.
Strategy Preparation for Fed-Driven Volatility
With the highly anticipated Federal Reserve interest rate decision this Wednesday, we recommend derivative traders prepare for heightened volatility in the AUD/USD pair. Given that market pricing for a rate hike has surged to 86.2% following the recent 3.4% annual CPI print, buying short-term straddles or strangles could help capitalize on sharp post-announcement swings. This strategy allows us to benefit from large price movements regardless of which direction the currency pair breaks.
If you prefer directional plays, we should focus on the growing downside momentum that could push the Aussie toward the 0.7120 support level. Utilizing bear put spreads targeting 0.7120 offers a defined-risk way to profit from this downward drift while limiting exposure if the US dollar weakens. Historical data shows that when the US-Australian yield differential widens, the AUD/USD frequently tests its 100-day moving average, which currently sits at a crucial 0.7080.
Domestic Support and Alternative Option Strategies
However, we must not ignore the Reserve Bank of Australia’s hawkish stance, as Assistant Governor Sarah Hunter recently hinted at potential rate hikes to combat sticky inflation. This domestic support means any aggressive drop in the Aussie might be short-lived, making selling out-of-the-money put options near the 0.7100 major support level an attractive premium-collection play. Over the last decade, the RBA’s aggressive rate postures have historically created strong floors for the currency during global market sell-offs.
Should the AUD/USD surprise us by breaking back above the strong resistance at 0.7210, we must quickly pivot our strategy. In this scenario, the pair is highly likely to remain trapped in its broader 0.7160 to 0.7240 consolidation range over the next three weeks. We can then employ iron condors or range-bound credit spreads to capture decaying option premium as the market quietens down.
