The RBA lifted the cash rate by 25 basis points to 3.85% after a material rise in inflation and stronger private demand. January CPI is due on Wednesday, after the prior reading showed headline inflation at 3.8% and the trimmed mean at 3.3%, above the 2% to 3% target band.
China’s central bank is expected to keep rates unchanged on Tuesday. US tariff policy shifted after the Supreme Court struck down IEEPA tariffs in a 6-3 ruling, followed by a proposed 15% global tariff under Section 122 from Tuesday.
Inflation And Policy Focus
AUD/USD fell 0.39% on Monday and failed to regain 0.7100. It remains above the 50-day EMA at 0.6880 and the 200-day EMA at 0.6650, with an uptrend from 0.6667 and a year-to-date high at 0.7147.
Stochastics have turned lower from overbought, and price action near 0.7050 to 0.7100 shows indecision. Support is at 0.7000, resistance at 0.7100 and 0.7147, with 0.7200 above and the 50-day EMA below.
AUD drivers include RBA policy, iron ore, China’s economy, inflation, growth and the trade balance. Iron ore totals $118 billion a year in exports (2021 data), mainly to China, and the RBA aims for 2% to 3% inflation.
Given the Reserve Bank of Australia’s recent rate hike to 3.85%, our immediate focus must be on inflation. The upcoming January CPI figures will be paramount, particularly as the last quarterly reading in late 2025 showed inflation running at 4.1%, still significantly above the RBA’s 2-3% target band. This persistent price pressure means we should be prepared for the RBA to maintain its hawkish stance, which could support the Aussie dollar.
However, we must temper this with the outlook from China, our largest trading partner. While their central bank is holding rates, recent economic data has been uninspiring, with last month’s Caixin Manufacturing PMI barely in expansionary territory at 50.8. This sluggishness could cap demand for our exports and, by extension, limit any significant rallies in the Australian dollar.
Key Market Risks And Trade Setup
This economic softness is already being reflected in the price of iron ore, a key driver for our currency. After trading above $140 per tonne late last year, prices have recently fallen back towards the $125 level amid concerns over Chinese demand. Traders should monitor commodity futures closely, as further weakness here will likely translate into direct pressure on the AUD/USD exchange rate.
A major wildcard for global markets is the renewed threat of a 15% global tariff from the United States. Such a move would almost certainly trigger a “risk-off” wave, prompting investors to flee to safe-haven assets and sell commodity-linked currencies like ours. This creates significant downside risk and makes holding unhedged long positions particularly dangerous in the coming weeks.
Looking at the charts, the AUD/USD is showing signs of exhaustion below the 0.7100 resistance level, and near-term momentum is fading. Considering the conflicting fundamental signals, a range-bound strategy or one that benefits from a slight pullback seems prudent. Selling call options with strike prices above 0.7150 could allow us to collect premium while we wait for a clearer directional catalyst from either the CPI data or geopolitical developments.
