The Australian dollar rose 0.2% to around 0.7180 against the US dollar in early European trading, supported by firmer-than-expected inflation data that lifted expectations of another Reserve Bank of Australia rate increase this year. Australia’s CPI rose 1% month-on-month in July versus forecasts of 0.8%, after a 0.1% fall in June. On a year-on-year basis, CPI came in at 3.5%, above the 3.2% estimate but below the prior 3.8%, while pricing shifted towards a fourth RBA hike in September with the implied probability rising to 36% from 17%; a move by February is priced at 94%. Minutes from the July meeting indicated several board members see a hike as “quite possible” if upside inflation risks emerge.
Attention then turns to US July PCE data due at 12:30 GMT. Core PCE inflation is expected at 3.3% year-on-year, with the monthly pace seen at 0.2% versus 0.1% previously. On charts, AUD/USD was at 0.7178, above the 20-period EMA at 0.7092, while the 14-day RSI stood at 68.36; resistance is at 0.7201 and 0.7278, with support around 0.7178 and 0.7092.
Trading Strategy for Continued AUD/USD Momentum
We recommend that derivative traders position for continued upward momentum in the AUD/USD pair over the coming weeks, targeting a breakout past the key resistance at 0.7201. With the Reserve Bank of Australia’s policy meeting approaching, call options with strike prices near 0.7250 offer an attractive risk-reward profile to capture this potential surge. Historically, when Australian inflation surprises to the upside, the currency tends to sustain its gains for multiple weeks, as seen during the late 2022 tightening cycle when the AUD rallied over 5% in a month.
Risk Management and Volatility Considerations
To manage risk, we advise establishing protective put options or tight stop-losses just below the 20-period exponential moving average at 0.7092. Since the Relative Strength Index is nearing overbought territory at 68.36, traders should anticipate short-term corrective pullbacks before the broader uptrend resumes. Leveraging knock-out barrier options could also be highly effective here to lower premium costs while protecting against sudden, sharp downside spikes.
Furthermore, we should closely monitor the upcoming US PCE data, as any cooler-than-expected inflation figures from the United States will likely accelerate the AUD/USD rally. Looking back at historical fed fund futures and currency reactions, a simultaneous hawkish RBA bias and dovish Federal Reserve outlook have consistently triggered strong multi-week trends. Using dual-currency options or straddle strategies ahead of the US inflation release can help us capitalize on the guaranteed volatility.
