AUD/USD falls to below 0.6700 as Australia’s inflation expectations decrease. The currency pair drops after Australia’s Consumer Inflation Expectations fall to 4.6% in January from 4.7% in December, suggesting continued high price pressures.
The Reserve Bank of Australia maintained the cash rate at 3.6%. Headline inflation slow-down to 3.4% year-on-year in November, yet it remains outside the RBA’s 2–3% target.
US Economic Developments
In the US, Retail Sales exceeded expectations, rising by 0.6% to $735.9 billion in November. The Producer Price Index (PPI) increased to 3% year-over-year, and the unemployment rate declined to 4.4% in December.
These developments support the likelihood that the US Federal Reserve will keep interest rates unchanged for the upcoming months, possibly strengthening the US Dollar.
Chinese economic conditions and the price of Iron Ore influence the Australian Dollar. The RBA’s interest rate decisions and the Trade Balance also play roles in determining the currency’s value.
High interest rates typically bolster the AUD, and favourable economic conditions in China can increase demand for exports, providing further support for the currency.
Historical Context and Current Situation
A year ago, in early 2025, we saw the AUD/USD pair slip as Australian inflation expectations eased and the US economy showed surprising strength. This combination of a patient Reserve Bank of Australia (RBA) and a strong US Dollar pushed the pair below the 0.6700 level. This outlook supported a bearish stance on the Australian dollar at the time.
Today, the situation has become more complex, creating potential for volatility. While Australian inflation did cool for much of 2025, the latest data for the fourth quarter showed headline CPI unexpectedly rose to 3.5%, putting pressure back on the RBA. This renewed inflation concern contrasts sharply with the easing price pressures we were observing this time last year.
On the US side, the dynamic has also shifted, as the Federal Reserve did begin cutting rates in the latter half of 2025. The Fed has since delivered three quarter-point cuts, bringing the target rate to the 4.75-5.00% range. Now, the market’s focus is on the pace of future cuts, making every US jobs and inflation report critical for the dollar’s direction.
Meanwhile, external factors are creating headwinds for the Aussie dollar. Iron ore, a key Australian export, has recently fallen from over $140 to around $125 per tonne amid ongoing uncertainty over Chinese property sector demand. This is a significant drag that was less of a concern in early 2025 when a stronger Chinese recovery was anticipated.
Given these conflicting signals, with a potentially more hawkish RBA but weakening commodity prices, traders should prepare for increased choppiness in the AUD/USD. The divergence between Australia’s domestic inflation picture and its external trade environment suggests the pair could see sharp moves in both directions. Derivative strategies that profit from a rise in volatility, such as long straddles or strangles, could be appropriate in the coming weeks.
