The Australian Dollar fell this week as a hawkish Federal Open Market Committee (FOMC) and a firmer US Dollar pushed AUD/USD down to the 0.7000 handle, with the move driven more by Washington than Canberra. The Reserve Bank of Australia (RBA) kept the cash rate at 4.35% but maintained a hawkish stance, saying inflation remains elevated and has picked up materially, with higher fuel and commodity prices linked to the Middle East conflict feeding into goods and services. Even so, the currency has struggled to respond, as it continues to trade as a liquid proxy for risk appetite and China, while soft Chinese demand and a heavy iron ore market constrain Australia’s terms of trade; the RBA’s projections also keep inflation above target into 2027. Next week brings domestic tests, led by May monthly CPI on Wednesday at 01:30 GMT, where annual inflation is seen edging up to 4.3% and the trimmed mean will be closely watched. The May jobs report follows on Thursday at the same time, after the previous month’s surprise job decline, but it coincides with the US first-quarter GDP third estimate and May PCE at 12:30 GMT. Technically, resistance sits at 0.7050, with the 50-day EMA near 0.7100, while support is 0.7000; below that, 0.6950 and the 200-day EMA near 0.6900 come into view, with Stoch RSI near oversold and a neutral-to-bearish bias below 0.7100.

External Drivers and Domestic Dynamics

We see the Australian Dollar being driven by events overseas rather than its own story. A strong US Dollar, fueled by a hawkish Federal Reserve, has recently pushed the AUD/USD pair down toward the 0.6600 level. While our domestic situation is quite different, the Aussie is currently a passenger in the Greenback’s trade. The Reserve Bank of Australia is not finished with its hawkish stance. With the latest quarterly CPI data showing inflation remains sticky at 3.8%, well above the RBA’s 2-3% target, the board has little room to consider easing rates. We believe this persistent inflation gives the Aussie a fundamentally strong footing compared to other currencies whose central banks are already cutting. However, this domestic strength has not translated into a higher exchange rate. The Aussie is highly sensitive to global risk sentiment, which has been dampened by the strong US dollar and persistent concerns over China’s economy. Weak demand from China has seen iron ore prices struggle to hold above $100 per tonne, capping any potential rallies in the currency.

Key Data Ahead and Positioning Strategies

Looking ahead, we are focused on next week’s monthly Australian CPI release. A hotter-than-expected number would reinforce the RBA’s hawkish position and could give the Aussie a reason to rally independently, even if just for a short time. Derivative traders might consider buying short-dated call options to position for a potential spike toward the 0.6700 resistance level. The main event, however, will be the US Personal Consumption Expenditures (PCE) price index later that week. History shows that in a direct showdown between strong Australian data and strong US inflation data, the US Dollar almost always wins. Therefore, we see the greater risk is to the downside if the US PCE print comes in hot. Our bias remains neutral-to-bearish while the pair sits below the 50-day moving average near 0.6700. For traders looking to hedge, buying put options with a strike price below the key 0.6600 support level offers protection against a sharp move down toward 0.6550. This strategy allows for participation in downside moves while capping the initial risk.

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