The Australian Dollar was little changed against the US Dollar on Friday, as the US Dollar gave back earlier gains after US Producer Price Index (PPI) data. AUD/USD was near 0.7112 and was set for an eighth straight week of gains.
US headline PPI rose 0.5% month-on-month, above the 0.3% forecast, and December was revised to 0.4% from 0.5%. Year-on-year PPI was 2.9% versus 2.6% expected, compared with a prior 3%.
Core Ppi Surprise And Market Reaction
Core PPI rose 0.8% month-on-month, above the 0.3% estimate, and December was revised to 0.6%. Core PPI was 3.6% year-on-year, up from 3.3%.
Markets expect the Federal Reserve to leave rates unchanged in March and April, based on the CME FedWatch Tool. The odds of a June cut fell, with July now favoured for the first cut.
The Australian Dollar was also supported by expectations of further Reserve Bank of Australia tightening, with inflation above the 2–3% target. Markets and CBA, Westpac, ANZ and NAB expect a 25-basis-point rise in May to 4.10%, after a possible March pause.
Australia’s TD-MI Inflation Gauge is due on Monday. The US Manufacturing PMI is also due.
Strategy Lessons From Early 2025
Looking back to early 2025, we saw the Australian Dollar showing remarkable strength against the US Dollar, even as American producer price data suggested inflation was proving stubborn. This divergence created a complex environment where the Aussie was on an eight-week winning streak. The immediate play was to follow the AUD’s upward momentum, driven by the hawkish Reserve Bank of Australia.
The market’s conviction at the time was that the RBA would hike rates again in May 2025, a view held by all major Australian banks. We can see from historical data that Australia’s Q4 2024 inflation rate was indeed elevated at 3.4%, justifying this hawkish stance. A straightforward derivative strategy would have been buying AUD/USD call options with expirations set for late May or June to capitalize on this expected rate increase.
However, the stronger-than-expected US core PPI figure was a significant warning sign that traders should not have ignored. The CME FedWatch tool was already signaling a delay in Fed rate cuts, shifting expectations from June to July 2025. This indicated that underlying US Dollar strength could return, making it essential to hedge long Aussie positions with protective put options.
We also noted the market complacency during that period in 2025, with volatility indexes being unusually low. History shows that such periods, like the low VIX readings seen throughout much of 2023 and 2024, often present opportunities to buy options cheaply. This made purchasing puts to protect against a sudden downturn in AUD/USD a cost-effective insurance policy against a hawkish Fed surprise.
From our vantage point today in February 2026, we know the RBA’s May 2025 hike was indeed its last for the cycle, while the Fed held firm longer than many anticipated, causing the AUD/USD to retrace its gains later that year. This experience is relevant now, as recent US Nonfarm Payrolls data showed a robust addition of 215,000 jobs, reinforcing the potential for US economic resilience. This serves as a lesson that central bank policy expectations can shift rapidly, and momentum can reverse.
