AUD/USD fell 0.30% on Friday to around 0.7170 after earlier touching 0.7206, its highest level since mid-May, as the US Dollar found fresh demand following hawkish comments from Federal Reserve Chair Kevin Warsh. He reaffirmed that price stability remains the central bank’s priority and said policymakers need confidence that underlying inflation is moving towards the objective, while maintaining the 2% Personal Consumption Expenditures (PCE) target. Rate expectations shifted quickly: the CME FedWatch Tool showed a roughly 60% probability of a September hike, up from about 36% before the speech, weighing on the pair.
The Australian Dollar drew some support from the Reserve Bank of Australia’s Bulletin, which said consumer prices have stayed above its 2%-3% target for much of the post-pandemic period, reinforcing expectations of a fourth rate increase before year-end. Inflation data were mixed: CPI eased to 3.5% year-on-year in July from 3.8% in June, yet stayed above the 3.2% consensus, while Trimmed Mean CPI held at 3.6% versus an expected 3.5%. On the charts, AUD/USD traded at 0.7166, above the 100- and 200-period SMAs at 0.7108 and 0.7053; RSI cooled to about 46, with support at 0.7135 and resistance at 0.7206.
Strategy Outlook: Positioning for USD Strength and Volatility
We recommend that derivative traders position for heightened volatility and a stronger greenback in the coming weeks. Following Fed Chair Kevin Warsh’s hawkish warning that inflation remains a primary threat, the probability of a September US rate hike has surged to 60%. This shift is already pulling capital back into US assets, pushing short-term Treasury yields higher and putting immediate pressure on the AUD/USD pair.
However, we must balance this USD strength against Australia’s stubborn inflation, which sat at 3.5% in July compared to the 3.2% market forecast. Because the Reserve Bank of Australia is widely expected to deliver another rate hike before the end of the year, the Australian Dollar still has a strong fundamental floor. To exploit this policy tug-of-war, we favor volatility-selling strategies like short straddles or iron condors, targeting the established trading range.
Technical Levels and Trade Setup
Technically, we should watch the key support zone between 0.7108 and 0.7117, which aligns with the 100-period simple moving average and rising trend-line. If the pair dips toward this region, we suggest buying short-term AUD/USD call options to capture potential rebounds. Conversely, we can look to establish defensive short positions if the pair struggles to break through the heavy resistance cap at 0.7206.
