The Reserve Bank of Australia surprised many by not cutting interest rates this week, keeping them steady at 3.85%. Despite market expectations of a 90% chance for a rate cut, the decision was made to maintain the current rate.
AUD/USD Market Expectations
The market is now anticipating an 87% probability of a rate cut in August. This decision led to a reversal in AUD/USD, which is currently testing last week’s highs.
Contributing to the Australian dollar’s rise is a positive outlook for risk appetite, with US equity indexes nearing record levels. Moreover, the market remains largely unaffected by threats of US tariffs.
Should the AUD/USD surpass the highs of July, it would reach its best levels since November, aiming for the high of 0.6942 from September 2024. The pair has already surpassed the 61.8% retracement from the September ’24 to April ’25 decline, signalling potential room for further gains. Attention should be given to Chinese economic data for additional positive indicators. However, cautiousness is advised regarding a possible hawkish repricing of the US dollar if US economic data, particularly employment figures, remain strong.
As it stands, monetary tightening from the Reserve Bank appears to have reached a temporary pause, throwing off earlier assumptions and catching out traders positioned for a cut. Rather than reacting with concern, markets adjusted with surprising speed—we noted a rally in AUD/USD that pushed the currency pair to retest earlier highs, clearly reflecting renewed buying interest and risk-seeking behaviour.
This move upwards is not happening in isolation. US equities continue to edge towards unprecedented levels, reinforcing a mood of optimism that is lifting high-beta currencies like the Aussie dollar. The backdrop also includes a market that seems largely indifferent to previous trade war rumblings from the United States, with tariff threats failing to derail the appetite for risk. Tariffs simply aren’t holding sway right now.
Market Dynamics and Future Outlook
What stood out for us was the clean break above the 61.8% Fibonacci level tracing the decline from September last year to earlier this spring, a move that often precedes reversion to previous swing highs. If this lift continues beyond recent peak levels, the next testing point appears fixed on the intraday high from late Q3 last year. The presence of those August rate expectations—still hovering around the 87% mark—means rate repricing remains a live theme.
We’re watching two forces closely: one, the data flow out of China, particularly industrial activity and consumption metrics, which could further support the pair; and two, the tone and strength of upcoming US employment releases. If labour market signals from the US remain firm, that would make a softening in the dollar harder to maintain. That kind of shift might prompt markets to start pricing in a less dovish path for US rates once more.
With that in mind, the path higher for AUD/USD does not look linear. Further appreciation from here requires both the continuation of upbeat sentiment and the absence of a surprise from US macro data. Any upward pressure on Treasury yields, driven by stronger-than-expected figures, could stall momentum quickly. It won’t take much to reintroduce dollar strength into the mix.
As always, we’re positioning with care and adjusting our options exposure in sync with rate readjustment probabilities and the technical levels being tested. Keep eyes on directionality, particularly if volatility jumps off today’s relatively low base. Timing entries around China’s next inflation and manufacturing prints could offer opportunistic trades, particularly if current trends stay intact.
Though near-term support holds well for now, sentiment could shift abruptly with a single data point.
