AUD/USD rebounded after opening the week with a bearish gap, rising from about 0.7030 to above 0.7100 during the Asian session. The move follows trading within a range that has held for around three weeks.
The US Dollar rose to its highest level since 23 January but struggled to extend gains amid fears of stagflation. US Producer Price Index (PPI) data released on Friday added to concerns about persistent inflation alongside weaker growth.
Usd Weakness Supports Aussie
This backdrop has limited the USD and supported AUD/USD, alongside expectations that policy in Australia may stay tighter. Markets are now pricing in the possibility of another Reserve Bank of Australia (RBA) rate rise in May, reinforced by January’s CPI release last week.
Geopolitical risk also remains in focus after a coordinated US–Israel strike on Iran, which has weakened broader risk appetite. That caution may restrain demand for the risk-sensitive Australian Dollar and limit further upside in the pair.
Coming events include the US ISM Manufacturing PMI later in the North American session and a speech by RBA Governor Michele Bullock on Tuesday. Data due Wednesday include quarterly Australian GDP, the US ADP private jobs report, and the US ISM Services PMI, followed by US Nonfarm Payrolls (NFP) later in the week.
We are seeing a different dynamic now compared to the environment back in early 2025. At that time, the AUD/USD was battling to hold the 0.7100 level, whereas today it is consolidating gains around 0.7350. The fundamental drivers have shifted significantly over the past year.
How The Macro Backdrop Has Shifted
Looking back to February 2025, we recall the market was aggressively pricing in Reserve Bank of Australia rate hikes following a hot January CPI report. Today, the RBA is firmly on hold as the latest quarterly CPI reading for Q4 2025 cooled to 3.5%, and last week’s monthly indicator for January 2026 showed a further dip to 3.1%. This suggests that options traders should be wary of paying high premiums for upside call options expecting RBA-fueled rallies.
The stagflation fears that gripped the US market in early 2025 have since given way to a clear disinflationary growth slowdown. While back then the Federal Reserve was in a difficult position, it has now embarked on a measured easing cycle, with the market pricing in a 90% chance of another 25-basis-point cut in April. The US Nonfarm Payrolls report for February 2026 showed job growth slowing to 150,000, well below forecasts, cementing this view.
This clear policy divergence between a dovish Fed and a neutral RBA provides a tailwind for AUD/USD that was absent during the uncertain, range-bound period of early 2025. Derivative traders might consider strategies that benefit from a steady, low-volatility grind higher, rather than positioning for sharp, unpredictable swings. Selling out-of-the-money AUD/USD puts could be a viable strategy to collect premium in this environment.
While the specific US-Israel tensions from last year have eased, the geopolitical landscape remains a source of headline risk that can cap gains. We are now more focused on trade frictions in the South China Sea, which continue to weigh on broader risk sentiment. This underlying risk suggests traders should remain disciplined and define their maximum loss when structuring any bullish positions.
