AUD/USD traded near 0.7090 on Wednesday, up 0.42% on the day. The move followed faster inflation in Australia, which increased expectations of tighter monetary policy.
Australian Bureau of Statistics data showed CPI rose 0.4% month-on-month in January, up from 0.1% in December. The Trimmed Mean rose 0.3% over the month, after 0.2% previously.
Australian Inflation Lifts RBA Tightening Expectations
On an annual basis, the Trimmed Mean increased to 3.4%, above the prior 3.3% and above forecasts. Headline inflation stayed at 3.8%, despite expectations for a small slowdown.
The Reserve Bank of Australia recently raised its cash rate by 25 basis points to 3.85%. It also noted continuing upside risks to inflation, and money markets fully price in another rate rise in the coming months.
In the US, the Dollar lacked clear direction after President Donald Trump’s address to Congress. The US Dollar Index hovered near 98.00 as markets assessed trade policy comments and the outlook, alongside mixed data affecting Federal Reserve expectations.
The recent backdrop favours AUD/USD in the short term due to differing policy paths between the RBA and the Fed. The pair remains sensitive to geopolitical and trade developments.
Trading Considerations For AUD USD
We are seeing a familiar pattern where Australian inflation data is coming in stronger than expected. The latest figures for January 2026 showed the monthly Consumer Price Index (CPI) rose 0.5%, beating forecasts and reigniting concerns about persistent price pressures. This is a dynamic we observed through parts of 2025, suggesting that the fight against inflation is not yet over.
This stubborn inflation supports the Reserve Bank of Australia’s decision to hold the cash rate at 4.35% in its February 2026 meeting, while maintaining a hawkish tone. This stance contrasts with market expectations from late 2025, when some were anticipating a shift towards a more neutral policy. The RBA’s firm position provides a fundamental strength to the Australian dollar.
Meanwhile, the situation in the United States shows a different picture. The most recent data on Personal Consumption Expenditures, the Fed’s preferred inflation gauge, showed a continued cooling trend, coming in at 2.4% for the year ending January 2026. This reinforces the view that the Federal Reserve is closer to considering interest rate cuts later this year, creating a clear policy divergence with Australia.
For derivative traders, this growing divergence suggests opportunities in long AUD/USD positions. Buying AUD/USD call options with expiry dates in the next one to three months could be a prudent strategy. This allows traders to capitalize on potential upside in the currency pair while defining and limiting their maximum risk.
Another approach would be to use the futures market to go long on the Australian dollar against the US dollar. This offers a more direct exposure to the anticipated appreciation of the AUD/USD exchange rate. However, we must remember that futures contracts carry greater risk than options if the market moves unexpectedly against the position.
Given the uncertain global environment, we could also consider strategies that benefit from an increase in volatility. With key central bank meetings on the horizon, purchasing a straddle on the AUD/USD could be effective. This involves buying both a call and a put option at the same strike price, profiting from a significant price move in either direction.
