Australian inflation data came in firmer than expected, keeping the possibility of another Reserve Bank of Australia (RBA) rate increase on the table. Headline CPI eased to 3.5% year-on-year in July from 3.8% in June, while trimmed mean inflation stayed at 3.6% year-on-year. The RBA’s target is an average trimmed mean inflation rate of 3.3% year-on-year in 2H26, leaving July’s reading above the path implied by that objective.
Rate pricing shifted after the release: markets moved to fully price an extra 25bp hike by February 2027, compared with around a 70% probability previously. That recalibration helped AUD/USD test resistance in the 0.7180–0.7200 area. Over the medium term, the narrative in the source points to slower growth and inflation edging towards target, alongside an eventual move away from restrictive policy, implying a more measured pace for further AUD advances.
Trading Recommendations and Market Outlook
We recommend that derivative traders establish long positions in AUD/USD as the pair tests critical resistance between 0.7180 and 0.7200. The latest July inflation data shows headline CPI at 3.5% and trimmed mean inflation holding firm at 3.6%, which is well above the central bank’s comfort zone. Because of this sticky inflation, swaps markets have now completely priced in an additional 25-basis-point interest rate hike by February 2027.
Yield Dynamics and Strategy Implementation
We expect the Australian Dollar to remain highly attractive over the next few months due to its appealing yield carry. With the Reserve Bank of Australia keeping its cash rate steady at 4.35% while other major central banks cut rates, the yield differential heavily favors the Aussie. Furthermore, China’s recent efforts to boost its economy with fresh monetary stimulus should support Australian commodity exports, which historically drives the currency higher.
In the coming weeks, we suggest buying AUD/USD call options with a strike price of 0.7250 to capture a potential breakout. Utilizing bull call spreads will help manage your risk and lower upfront costs while options volatility remains relatively cheap. However, you should maintain tight stop-losses on any direct long futures contracts to protect against sudden swings in global market sentiment.
