AUD/USD traded around 0.7080 in Monday’s Asian session, up 0.10% on the day, after easing from a three-year high reached last week. The pair hovered in the mid-0.7000s and was watched for a move towards 0.7100.
The US dollar stayed range-bound amid expectations of a more accommodative Federal Reserve. After softer US consumer inflation data on Friday, markets increased pricing for a June rate cut.
Fed Rba Policy Divergence
The Fed was also expected to deliver at least two 25 basis point rate cuts in 2026. In contrast, the Reserve Bank of Australia was expected to raise rates again in May, supporting the Australian dollar.
China’s inflation data last week added concerns about ongoing deflationary pressure in the world’s second-largest economy. The figures increased expectations of further fiscal and monetary stimulus, which can support the Australia-linked currency.
Attention turned to the FOMC Minutes on Wednesday and Australian employment data on Friday. Other drivers for the Australian dollar include RBA policy, Australian inflation targeting of 2–3%, iron ore prices, China’s demand, trade balance, and broader risk sentiment.
Iron ore was cited as Australia’s largest export, worth $118 billion a year based on 2021 data.
Trade Strategy Implications
The divergence between the Federal Reserve and the Reserve Bank of Australia is creating a clear opportunity for us. Markets are now pricing in over a 70% chance of a Fed rate cut by June, while our own RBA is expected to hike rates again as soon as May. This policy difference strongly suggests we should consider strategies that benefit from a rising AUD/USD in the coming weeks.
The recent softness in the US dollar is directly tied to inflation figures, which showed the January Consumer Price Index came in below expectations at 2.9%. This reinforces the view that the Fed will have to act, with futures markets suggesting at least two rate cuts are likely this year. This environment makes it difficult to justify holding long positions in the US dollar against the Aussie.
On the Australian side, strength is supported by key commodity prices, with iron ore recently trading firmly above $130 per tonne, a significant recovery from the lows we saw in 2025. Hopes for further stimulus from Beijing, especially after weak inflation data last week, are also providing a tailwind for the Aussie. A strong Australian employment report this Friday would only add to this bullish case.
Given this outlook, we should be looking at buying March or April call options on the AUD/USD. A move towards and above the 0.7100 level seems increasingly likely, making strikes around that mark attractive for capturing the expected upside. This strategy offers a defined-risk approach to capitalize on these clear fundamental trends.
