The Australian Dollar (AUD) attempts a rebound backed by the generalised improvement in the risk-linked galaxy alongside fresh weakness hurting the US Dollar (USD). Meanwhile, persistently elevated domestic inflation and the RBA cautious stance should keep the constructive outlook for the Aussie well in place for now.
The Australian Dollar (AUD) extends its bounce on Wednesday, with AUD/USD advancing for the second day in a row and shifting its attention back to the key 0.7000 region in the short term.
The continuation of the pair’s bounce comes in response to further loss of momentum in the Greenback, as investors continue to gauge the likelihood that an end to the Middle East conflict could be within reach.
Australia: still solid, but starting to lose a bit of momentum
Australia still looks pretty decent on the surface, and that’s what’s keeping a floor under the Aussie. But once you scratch a little deeper, it’s clear the story is starting to cool at the margins.
The overall mix hasn’t really changed. Growth is holding up, inflation is still elevated, and the Reserve Bank of Australia (RBA) remains on the hawkish side. That combination is still supportive for the AUD.
But the early cracks are there. March’s final Purchasing Managers’ Index (PMI) slipped into contraction at 49.8, while services are seen around 46.6. That points to a gradual loss of momentum in business activity. Trade is still helping, with a A$2.631 billion surplus at the start of the year, but it’s not enough to offset the softer tone elsewhere.
Zooming out, the economy is still expanding at a decent clip. Gross Domestic Product (GDP) grew 0.8% QoQ in Q4 and 2.6% YoY, while the labour market is only easing slowly, with unemployment at 4.3% and Employment Change still positive at 48.9K.
Inflation, though, remains the key issue. The latest data show only marginal improvement, with the Consumer Price Index (CPI) at 3.7% YoY, the Trimmed Mean at 3.3%, and the Weighted Median at 3.5%. Disinflation is happening, but it’s slow and not enough to make the RBA comfortable.
From a policy perspective, the job is clearly not done. Inflation is not expected back at target until mid-2028, so the pressure is still very much there.
China: no longer a drag, but not a driver either
China’s role in the Aussie story has clearly shifted. It’s no longer the engine, more of a stabiliser in the background.
The headline numbers look fine. Growth at 4.5% in Q4 2025, retail sales up 2.8% YoY, and trade broadly holding up. But underneath, things are more mixed.
Official PMI data from the National Bureau of Statistics (NBS) are still in contraction territory, while private surveys like RatingDog tell a more positive story.
Inflation adds to that “in-between” picture. The CPI rose 1.2% YoY, while the Producer Price Index (PPI) remains in deflation at -0.9% YoY. That gives the People’s Bank of China (PBoC) room to stay on hold, keeping the Loan Prime Rates (LPR) unchanged.
For the Aussie, the takeaway is quite straightforward: China is no longer weighing on it, but it’s not giving it a lift either.
RBA: clear direction, messy timing
The RBA’s latest move tells you a lot. A tight 5–4 vote to lift the Official Cash Rate (OCR) to 4.10% shows just how finely balanced things are.
The message itself hasn’t really changed. Capacity constraints are still there, and higher oil prices could push inflation higher in the near term. Governor Michele Bullock made it clear that excess demand is still the core issue.
The real debate now is about timing. Some policymakers would rather pause and see how all these external shocks play out.
The Minutes reinforced that uncertainty. After two hikes this year, the Board basically admitted there’s limited visibility on where rates go next, especially with geopolitics in the mix.
Markets, though, are still leaning towards more tightening, with roughly 59 basis points priced in by year-end.
AUD positioning: leaning long, but not fully convinced
Positioning is starting to turn more constructive, but it doesn’t feel fully convincing.
The latest data from the Commodity Futures Trading Commission (CFTC) show net longs building above 70K contracts. But the price is not following; AUD/USD has drifted from above 0.7100 to below 0.7000.
That divergence is telling.
It looks like investors are positioning for a medium-term Aussie story, but without near-term confirmation. On top of that, open interest has eased, suggesting the conviction behind those longs isn’t particularly strong.
What it means
This is where things get a bit tricky.
When positioning builds but price doesn’t follow, it often leaves the market vulnerable. If the US Dollar keeps strengthening or the macro backdrop turns, those longs can unwind pretty quickly.
FX takeaway
The Aussie still has a decent macro story behind it, but in the short term it’s looking more fragile.
Without clearer upside momentum, positioning risks becoming a headwind rather than support, especially in a more cautious market.
AUD/USD: how it could play out
Base case: The pair stays capped below 0.7050 and trades with a softer tone, with the USD and geopolitics still in the driver’s seat.
Bull case: A sustained shift in risk sentiment or disappointing US data releases could push AUD/USD back above 0.7100 and validate the long positioning.
Bear case: Stronger USD or weaker signals from China could trigger a squeeze, opening the door to a move towards 0.6800.
What to watch
In the near term, it’s all about the US Dollar, risk sentiment, and geopolitical headlines. Domestically, trade data could add some volatility, while US labour market releases and any updates from Trump will also matter.
Risks remain skewed to the downside, especially if China disappoints, oil moves higher, or the Fed leans more hawkish.
Technical landscape
In the daily chart, AUD/USD trades at 0.6941. The near-term bias turns cautiously bearish as the pair slips back toward the mid-0.69s after failing to sustain gains above the 23.6% Fibonacci retracement at 0.6976, measured from the 0.6421 low to the 0.7147 high. Price now sits just under the rising 55- and 100-day Simple Moving Averages (SMAs) clustered in the 0.6990-0.6820 band, while it still holds comfortably above the 200-day SMA near 0.6680, framing an overall uptrend facing a corrective phase. The Relative Strength Index (RSI) at 45 shows momentum cooling below the 50 line, aligning with fading bullish pressure as the Average Directional Index (ADX) near 26 signals a moderating but still notable trend environment.
Initial resistance is seen at the 23.6% retracement at 0.6976, with a sustained break above exposing the horizontal barrier at 0.7158 and then 0.7283. On the downside, immediate support is located at the horizontal line at 0.6833, ahead of the 50% retracement at 0.6784, which would become pivotal if selling extends. Below there, the the 200-day SMA around 0.6680 comes next, seconded by the 0.6660 and 0.6593 supports. A deeper decline would bring the 0.6414 and 0.6373 levels into focus.
(The technical analysis of this story was written with the help of an AI tool.)
To sum up: supported, but not a clean trade
The Aussie is still underpinned by relatively solid fundamentals, and the RBA is not backing away.
But this is far from a straightforward bullish setup.
When markets are calm, AUD does well. When volatility picks up, the US Dollar takes over.
The bias is still constructive, but near-term risks are clearly tilted to the downside.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
