AUD/USD traded near 0.7010 on Thursday, up 0.82% on the day, as broad US Dollar weakness outweighed softer Australian inflation. Australia’s CPI cooled to 3.8% year on year in June from 4% and undershot the 4% consensus, pushing market pricing for an RBA rate rise in August down from nearly 21% to around 3%–4%, according to Reuters.
The pair later turned higher as the US Dollar retreated after the Fed meeting and weaker US data. US GDP rose at an annualised 1.5% in the second quarter versus a 2.1% expectation, and it slowed from 2.1% in the first quarter; the Bureau of Economic Analysis attributed the deceleration to softer government spending, investment and exports, partly offset by firmer consumer spending. Inflation readings also eased, with the PCE Price Index down 0.1% month on month in June and the yearly rate at 3.7% versus 4.1%, while Core PCE dipped to 3.3% year on year from 3.4%. The Fed held rates at 3.5%–3.75% on Wednesday.
Options Strategies Amid AUD/USD Breakout
We suggest derivative traders focus on buying short-term AUD/USD call options as the currency pair breaks above the key 0.7000 psychological level. Despite cooler Australian inflation of 3.8% reducing the likelihood of a domestic rate hike, the sharp decline in the US Dollar is driving strong upward momentum. Historically, when the Aussie clears this threshold, it frequently triggers short-covering rallies that can push the pair toward the 0.7150 mark in the coming weeks.
We believe the US Dollar will continue to face downward pressure as key macroeconomic data misses expectations, highlighted by the lackluster 1.5% annualized GDP growth. Traders should consider bearish USD strategies, such as buying put options on the US Dollar Index, which is currently testing major support levels. The market is clearly discounting the Federal Reserve’s hawkish tone, focusing instead on the slowing Core PCE inflation of 3.3%.
Managing Volatility and Downside Risks
To exploit this trend, we recommend executing bull call spreads to capture upside potential while keeping premium costs low. Looking at historical data, one-month implied volatility for the AUD/USD pair often rises by 8% to 12% during periods of central bank divergence, favoring option buyers. This setup allows us to benefit from the current momentum without overexposing ourselves to sudden market swings.
Since the probability of an August RBA rate hike has plunged to just 3% to 4%, the downside risks for the Aussie are already heavily priced in. This makes the currency pair highly sensitive to the next wave of US employment and inflation data. We advise keeping stop-losses tightly anchored around the 0.6950 support level to protect capital in case of a sudden trend reversal.
