AUD/USD failed to build on Thursday’s rebound from 0.7030–0.7025, a level described as a one-week low, and met new selling on Friday. It traded just above the mid-0.7000s in early European hours, down 0.25%, as the US dollar firmed slightly.
US dollar gains were limited by expectations of a dovish Federal Reserve. Chicago Fed President Austan Goolsbee said on Tuesday that several rate cuts could still happen this year if inflation moves back towards the 2% target, following softer US consumer inflation data last Friday.
Risk Sentiment Improves
Risk sentiment improved after signs of progress in US–Iran nuclear talks, reducing fears of a direct military clash. This supported equity markets and helped cap demand for the safe-haven US dollar, offering some backing to the risk-sensitive Australian dollar.
The Reserve Bank of Australia recently lifted the Official Cash Rate for the first time in more than two years and described the labour market as tight. It forecast 2.1% growth by June and expects inflation to be higher in 2026, keeping the option of further rate rises.
Markets are watching the FOMC Minutes later today and Friday’s US PCE Price Index. Australia’s monthly employment report later in the week may also affect AUD/USD.
Looking back to this time in 2025, we saw the AUD/USD pair struggling around the 0.7050 mark, with a clear tug-of-war between a dovish Federal Reserve and a hawkish Reserve Bank of Australia. The market was anticipating Fed rate cuts while the RBA was just beginning its hiking cycle. That fundamental divergence was the key theme shaping our outlook.
How The Divergence Played Out
That divergence did play out over the last year, pushing the pair significantly higher, and we are now trading closer to 0.7450. The Fed did deliver rate cuts through mid-2025, but the RBA continued to raise its cash rate to 4.85% to combat persistent inflation. This created a favorable interest rate differential for the Aussie dollar, which traders capitalized on.
Now, the Australian story remains strong, as the Q4 2025 inflation data came in hotter than expected at 3.8%, well above the RBA’s target range. Furthermore, January’s employment report showed the unemployment rate holding firm at 4.0%, suggesting the labor market remains tight. This data supports the view that the RBA will not be in a hurry to cut rates.
On the other hand, the narrative in the US is shifting again, creating uncertainty. The most recent Personal Consumption Expenditures (PCE) Price Index for January 2026 showed a slight uptick to 2.8%, disrupting the steady decline we saw in the back half of 2025. This has poured some cold water on expectations for further Fed rate cuts in the near term.
This current tension between a strong Aussie economy and a potentially stubborn US inflation picture suggests volatility could increase in the coming weeks. For derivative traders, this environment makes buying options strategies like straddles attractive, as they profit from a large price move in either direction. The cost of these options is justified by the conflicting signals from both central banks.
Alternatively, the positive carry from holding the Aussie against the greenback remains a powerful driver. Traders can consider selling out-of-the-money AUD/USD puts to collect premium, which benefits from both time decay and the interest rate differential. This strategy expresses a cautiously bullish view while generating income if the pair trades sideways or moves higher.
