AUD/USD could not extend Thursday’s bounce from 0.7030–0.7025 (a one-week low) and came under fresh selling on Friday. In early European trading, it held just above the mid-0.7000s, down 0.25%, as the US dollar firmed slightly.
US dollar gains stayed limited because markets still expect a dovish Federal Reserve. Chicago Fed President Austan Goolsbee said on Tuesday that several rate cuts could still happen this year if inflation moves back toward the 2% target. His comments followed softer US consumer inflation data released last Friday.
Risk Sentiment Improves
Risk sentiment improved after reports of progress in US–Iran nuclear talks, easing fears of a direct military clash. That supported equity markets and reduced demand for the safe-haven US dollar. In turn, it helped support the risk-sensitive Australian dollar.
The Reserve Bank of Australia (RBA) recently raised the Official Cash Rate for the first time in more than two years and said the labour market remains tight. It forecasts 2.1% growth by June and expects inflation to be higher in 2026, which leaves the door open to further rate hikes.
Traders are focused on the FOMC Minutes later today and Friday’s US PCE Price Index. Australia’s monthly employment report later in the week could also move AUD/USD.
At this time in 2025, AUD/USD was stuck near 0.7050, pulled in two directions by a dovish Fed and a hawkish RBA. Markets expected Fed cuts while the RBA was only starting its hiking cycle. That policy gap was the main theme driving the outlook.
How The Divergence Played Out
That divergence played out over the past year and pushed the pair much higher. AUD/USD is now trading closer to 0.7450. The Fed did cut rates through mid-2025, while the RBA kept raising its cash rate to 4.85% to fight stubborn inflation. This widened the interest-rate gap in favour of the Aussie, and traders took advantage.
Australia’s outlook also remains firm. Q4 2025 inflation came in hotter than expected at 3.8%, well above the RBA’s target range. January’s jobs report showed unemployment steady at 4.0%, which suggests the labour market is still tight. Together, these numbers support the view that the RBA is unlikely to rush into rate cuts.
In the US, the story is shifting again, adding uncertainty. The latest PCE Price Index for January 2026 rose slightly to 2.8%. That breaks the steady decline seen in the second half of 2025 and weakens the case for more Fed cuts in the near term.
This push-and-pull—strong Australian data versus potentially sticky US inflation—could lift volatility in the weeks ahead. For derivatives traders, this can make long-volatility option strategies such as straddles appealing, since they benefit from a large move in either direction. In this context, the higher option cost can be easier to justify given the mixed central-bank signals.
Another factor is the positive carry from holding AUD versus USD, which remains a key support. Traders may consider selling out-of-the-money AUD/USD puts to collect premium, benefiting from time decay and the interest-rate advantage. This expresses a cautiously bullish view while generating income if the pair moves sideways or higher.
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