For the time being, the near-term outlook for the Australian Dollar (AUD) remains positive, supported by consistently strong inflation in Australia and the RBA’s hawkish inclination. This background is expected to support future advances in AUD/USD while also providing a buffer against occasional pullbacks.
The Australian Dollar (AUD) further extends its weekly corrective move, dragging AUD/USD to as low as the 0.6950 region on Tuesday, where some initial contention appears to have turned up.
The negative performance of spot comes in response to marked gains in the US Dollar (USD), as market participants continue to closely follow developments in the Middle East, where tensions have been anything but subsiding.
Australia: cooling slightly, but inflation still sticky
Australia’s story hasn’t really changed, and that’s precisely the point. The backdrop remains firm enough to keep a floor under the Australian Dollar (AUD), but not soft enough to give the Reserve Bank of Australia (RBA) much comfort. Growth is holding up, inflation is proving sticky, and the RBA continues to lean hawkish, a mix that still offers a decent cushion for the currency.
That said, there are early signs of cooling. Business activity looks to have softened, with the Purchasing Managers’ Index (PMI) expected at 50.1 in manufacturing and 46.6 in services for March. Trade remains supportive, with a A$2.631 billion surplus at the start of the year.
More broadly, momentum is still there. Gross Domestic Product (GDP) expanded by 0.8% QoQ in Q4 and 2.6% YoY, while the labour market is easing only gradually, with unemployment at 4.3% and employment change rising by 48.9K.
Inflation, however, remains the sticking point. The Consumer Price Index (CPI) is running at 3.8% YoY, with the trimmed mean at 3.4%. Disinflation is underway, but the pace is slow, and for the RBA, not nearly enough. Inflation is not expected to return to target until mid-2028, keeping pressure firmly in place.
China’s influence on Australia’s economic narrative has undeniably changed. It’s no longer the primary driver of growth; instead, it’s become a stabilising force, operating somewhat out of the spotlight.
The economy grew by 4.5% in the fourth quarter of 2025, and retail sales saw a year-on-year increase of 2.8%. Trade conditions generally remain favourable. Yet, the underlying specifics are more complex.
The National Bureau of Statistics’ (NBS) official Purchasing Managers’ Index (PMI) figures persist in indicating a contraction. However, private surveys, such as those conducted by RatingDog, offer a more positive outlook.
The overall situation is further complicated by the current inflation trends.
The Consumer Price Index (CPI) climbed 1.2% year-on-year in February, yet the Producer Price Index (PPI) is still in deflation, down 0.9% year-on-year.
This gives the People’s Bank of China (PBoC) room to stay on hold, with Loan Prime Rates (LPR) unchanged at 3.50% and 3.00%.
For the AUD, the takeaway is straightforward. China is no longer a drag, but it is not providing a strong tailwind either.
RBA: direction clear, timing less so
The RBA’s latest decision speaks volumes. A tight 5–4 vote to lift the Official Cash Rate (OCR) to 4.10% highlights just how finely balanced the outlook is.
The broader message remains consistent. Capacity constraints persist, and higher oil prices could add to near term inflation pressures. Governor Michele Bullock reinforced that view, pointing to excess demand as the core issue, with energy shocks adding further upside risks.
At this stage, the debate is less about direction and more about timing. Some policymakers favour a pause to assess how external shocks feed through. Markets are leaning in that direction, pricing a pause in May, while still expecting around 62 basis points of additional tightening this year.
Wednesday’s inflation release will be key in shaping expectations for the next move.
AUD positioning: improving, but not convincing
Positioning data suggest sentiment towards the AUD is turning more constructive. The latest Commodity Futures Trading Commission (CFTC) figures show net long positions rising to just above 69K.
However, open interest dropped sharply to around 265K contracts, pointing more to short covering than fresh buying. Additionally, price action supports that view, with AUD/USD slipping back toward the 0.7100 area.
That said, positioning is improving, although conviction seems to be limited. The shift looks more like bearish pressure easing rather than strong bullish demand coming in.
FX takeaway
The AUD is starting to look better supported, but the foundations are not yet fully convincing. In the near term, it remains highly sensitive to global risk sentiment and developments out of China. A sustained upward trend would probably demand actual inflows, not just tweaks to existing positions.
What’s next for AUD/USD
Near term: the pair should remain almost exclusively influenced by the Greenback and overall market sentiment. On the docket, the Australian inflation figures will take center stage on Wednesday.
Risks: a waning appetite for risk, underwhelming economic data from China, or a rebound in the US Dollar’s power. Any of these factors could swiftly alter the landscape.
Bottom line: the support is there, but don’t expect a free pass.
Australia’s economy is holding up well, and its central bank isn’t signalling any intention to backtrack.
But this is far from a one-way trade.
When risk sentiment is stable, the AUD tends to perform well. When volatility rises, the US Dollar regains control. The bias remains supportive, but it comes with clear conditions attached.
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.
