AUD/USD has dropped below 0.6700 due to decreased inflation expectations in Australia. The currency pair fell after Australia’s Consumer Inflation Expectations dropped from 4.7% in December to 4.6% in January, indicating ongoing price pressures. The Reserve Bank of Australia (RBA) kept the cash rate steady at 3.6%. Although headline inflation slowed to 3.4% year-on-year in November, it still exceeds the RBA’s target range of 2-3%.

US Economic Developments

In the US, Retail Sales surpassed predictions, increasing by 0.6% to $735.9 billion in November. The Producer Price Index (PPI) rose to 3% year-over-year, and the unemployment rate fell to 4.4% in December. These factors suggest that the US Federal Reserve may maintain current interest rates for the next few months, which could strengthen the US Dollar. Chinese economic conditions and iron ore prices significantly affect the Australian Dollar. The RBA’s interest rate decisions and the Trade Balance also influence its value. Higher interest rates generally support the AUD, and strong economic conditions in China can boost demand for Australian exports, further aiding the currency.

Historical Context and Current Situation

Last year, in early 2025, the AUD/USD pair declined as Australian inflation expectations dropped and the US economy showed unexpected strength. This combination of a cautious RBA and a strong US Dollar pushed the exchange rate below 0.6700, leading to a bearish outlook for the Australian dollar. Now, the situation is more complicated and may lead to volatility. Although Australian inflation eased for most of 2025, recent data for the fourth quarter revealed an unexpected rise in headline CPI to 3.5%, returning pressure to the RBA. This renewed inflation concern contrasts sharply with the decreasing price pressures seen last year. On the US front, the situation has also changed, as the Federal Reserve began lowering rates in the latter half of 2025. The Fed has implemented three quarter-point cuts, decreasing the target rate to the 4.75-5.00% range. Now, the market is closely watching the pace of future cuts, making every US jobs and inflation report crucial for the dollar’s trajectory. Meanwhile, external factors are creating challenges for the Australian Dollar. Iron ore, a major Australian export, recently fell from over $140 to around $125 per tonne due to ongoing uncertainty about demand in China’s property sector. This situation is a significant concern, especially compared to early 2025 when a stronger recovery in China was expected. Given these mixed signals, with a potentially more assertive RBA and declining commodity prices, traders should brace for increased volatility in the AUD/USD pair. The contrast between domestic inflation in Australia and external trade conditions suggests that sharp price movements could occur in either direction. Strategies that capitalize on rising volatility, such as long straddles or strangles, might be beneficial in the coming weeks. Create your live VT Markets account and start trading now.

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