AUD/USD fell for a second session and traded near 0.7110 in Asia on Friday. Further losses may be limited if the Australian Dollar firms on cautious expectations for Reserve Bank of Australia policy.
Markets expect the RBA to keep the cash rate at 3.85% at the March meeting. Policymakers will not have the full Q1 inflation report until late April, and Governor Michele Bullock said patience remains appropriate with the economy near equilibrium.
Rba Policy Expectations
A stronger January inflation reading has lifted expectations of a possible RBA rate rise in May. Markets price about 40 basis points of extra tightening this year, while many analysts put the peak rate near 4.10%.
The pair may also find support if the US Dollar remains under pressure due to uncertainty over US trade policy. Traders are watching the US January Producer Price Index release later on Friday for signals on Federal Reserve policy.
President Donald Trump said he plans a blanket 15% tariff on imports after a Supreme Court ruling struck down his earlier reciprocal tariff approach. US Trade Representative Jamieson Greer said tariffs could be raised to 15% or more for several countries in the next few days.
We recall that around this time in 2025, the market was anticipating a patient Reserve Bank of Australia. The focus then was on potential US tariffs and an RBA peak rate of 4.10%. Those tariffs did materialize, significantly altering the landscape for the US Dollar.
Current Backdrop And Market Positioning
The situation today is quite different, as the RBA is now signaling a clear easing bias. The latest quarterly inflation figures from the Australian Bureau of Statistics show CPI has fallen to 3.1%, down sharply from the 2025 peaks. Markets are now pricing in a 75% chance of a rate cut by the May 2026 meeting.
Meanwhile, the US continues to grapple with the inflationary effects of the 15% blanket tariff enacted last year. The latest Core PCE data from the Bureau of Economic Analysis is holding stubbornly above 3.5%, forcing the Federal Reserve to maintain a restrictive stance. This policy divergence is a key headwind for the AUD/USD pair.
For the coming weeks, this points toward strategies that benefit from a declining or range-bound AUD/USD. Volatility is expected to pick up around the upcoming RBA meeting, making long put options on the Aussie dollar a potentially attractive hedge. Selling call option spreads could also be a way to capitalize on limited upside potential for the pair.
