Drivers Behind The Move
Gains in AUD/USD were limited by support for the US Dollar. Crude Oil jumped more than 25% in a single session, adding to inflation worries and lowering expectations for near-term US rate cuts. Middle East tensions also supported demand for the US Dollar. Mojtaba Khamenei was announced as Iran’s new Supreme Leader, and US President Donald Trump said the appointment would be “unacceptable”. The US Dollar Index traded around 99.15, up 0.18% on the day. Markets are watching US CPI for February on Wednesday for clues on Federal Reserve policy and the next move in AUD/USD. We are looking at a very different picture today compared to the optimism we saw for the Aussie dollar back in early 2025. Last year, a surprise jump in China’s February CPI to a three-year high of 1.3% helped push the AUD/USD pair above the 0.7040 mark. Today, the pair is trading much lower around 0.6550 as China’s post-pandemic recovery shows signs of stalling.How Traders May Position
The latest data for February 2026 showed China’s CPI was a muted 0.5% and the Producer Price Index fell again by 2.5%, a sharp contrast to the stabilizing numbers we saw in 2025. This sustained weakness in Chinese factory-gate prices suggests sluggish industrial demand, a key headwind for the Australian economy and its currency. Therefore, traders should consider buying put options to hedge against further downside in the AUD/USD below the 0.6500 level. On the other side of the trade, the US Dollar Index (DXY) is significantly stronger now, sitting around 104.20 compared to the 99.15 level seen this time last year. While the surge in oil prices during 2025 delayed Fed rate cuts then, the narrative for 2026 is now firmly focused on when the Fed will begin its easing cycle. We see the Fed Funds Rate holding at 4.75%, with markets pricing in two potential cuts by the end of this year. This outlook suggests using options to trade a range rather than a strong directional move in the US dollar. With oil prices having stabilized near $82 a barrel, the inflation shock of 2025 is no longer the primary driver. All eyes are now on this week’s US CPI data for February 2026, as any signs of persistent inflation could push back expectations for rate cuts and cause a spike in currency volatility. Create your live VT Markets account and start trading now.
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