The Australian Dollar has dropped for four straight sessions against the US Dollar due to the latter’s strength. Traders are cautious even after soft US Producer Price Index (PPI) data because of ongoing inflation concerns and potential tariff threats from the US. Right now, the AUD/USD pair is close to the key support level of 0.6500, having decreased by more than 1% this week. The US Dollar Index has hit a three-week high at about 98.80. Recent US PPI data showed no growth, falling short of expectations, while the annual PPI dropped to 2.3% from 2.6%.

Core PPI Data

Core PPI remained unchanged, contrary to predictions, and fell to 2.4% year-on-year. Despite this weaker data, the market is focused on the stubbornly high Consumer Price Index and comments from the Federal Reserve that discourage expectations for rate cuts. Global trade tensions are also supporting the US Dollar. In Australia, economic data is disappointing as well, with consumer confidence declining and only 0.2% growth in the first quarter. Inflation is now close to the Reserve Bank of Australia’s lower target, raising chances for future rate cuts. Upcoming employment data and US Retail Sales numbers could further affect the market. These indicators are crucial for understanding consumer spending and possible monetary policy changes in both regions. The Australian Dollar’s weakness against the US Dollar appears to be an ongoing trend, driven by different monetary policy outlooks. Although the pair recently bounced back from 0.6500 to around 0.6650, we believe the fundamental factors for a lower valuation are still strong. This situation presents opportunities for traders expecting renewed downward pressure. Australia’s economic situation calls for caution, despite some positive signs. The latest employment report for April showed an unexpected gain of 38,500 jobs, but this is unlikely to change the central bank’s cautious stance. With GDP growth at just 0.1% and fragile consumer sentiment, the possibility of future rate cuts remains a major concern.

Strong Greenback Outlook

On the flip side, the case for a strong US Dollar is supported by recent comments from central bank officials. Federal Reserve leaders consistently stress a data-driven, patient approach to any potential rate cuts, pointing out that inflation remains above target. As a result, the market is pricing in higher US interest rates for a longer time, which strengthens the currency. For derivative traders, this environment suggests positioning for a decline or limited upside in the pair. We believe buying AUD/USD put options with strike prices below 0.6600 offers a clear path to profit from a drop back towards the year’s lows. This strategy helps traders manage their risk while capturing potential downward movement. Looking back at 2022, a similar period of aggressive Fed tightening saw the currency pair fall from over 0.7200 to below 0.6300 in just a few months. This history shows how quickly a divergence in policies can affect the exchange rate. A break below the key psychological support mentioned earlier could trigger a similar, rapid decline. Create your live VT Markets account and start trading now.

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