AUD/USD slipped 0.22% to about 0.7035 in early European trading as the US Dollar rebounded after Iran, according to Fars News, denied agreeing to a Memorandum of Understanding with the US that President Donald Trump said had been approved by Tehran’s top leadership. The US Dollar Index (DXY) was up 0.15% to around 99.85. Trump said on Thursday that planned attacks on Iran had been called off and that a peace deal’s final points had been approved in concept and detail, while adding the US naval blockade of Iranian ports would stay in place until the agreement is finalised.
The Australian Dollar traded cautiously ahead of the Reserve Bank of Australia (RBA) decision on Tuesday. A Reuters poll forecast the RBA will pause and keep the Official Cash Rate (OCR) at 4.35% after 75 bps of hikes this year. Technically, AUD/USD remained below the 20-day EMA at 0.7103 and the 50% Fibonacci retracement at 0.7054, while holding just above the 61.8% level at 0.7002; the RSI (14) sat around 39 after a drop from the mid-0.72 area. Further support is seen at 0.6929 and 0.6834, while resistance sits at 0.7106, then 0.7171 and 0.7274.
Downside Risks Grow Amid Robust US Data and RBA Uncertainty
We are seeing the AUD/USD pair struggle below the key 0.6700 level. The US dollar is gaining strength from recent robust economic data, while the Aussie dollar waits cautiously for signals from the Reserve Bank of Australia. This creates a challenging environment where downside risks appear to be growing in the coming weeks.
The US dollar’s rebound is supported by the recent May jobs report, which showed a stronger-than-expected 250,000 jobs added against forecasts of 180,000. This data reinforces the view that the Federal Reserve will keep interest rates higher for longer, making the dollar more attractive. As long as this narrative holds, the path of least resistance for the dollar appears to be upward.
On the other side, we anticipate the RBA will hold its cash rate steady at 4.10% next week, but the market’s focus will be on their future guidance. With the latest monthly CPI figure at 3.2%, inflation is proving sticky and remains above the RBA’s 2-3% target band. Any hint from the RBA that they are becoming more concerned about growth could weigh heavily on the Aussie dollar.
Option Strategies for Speculating on Volatility
Given this backdrop, we believe purchasing put options is a prudent strategy to hedge against or speculate on a further decline in AUD/USD. A break below the 0.6600 support level could accelerate the move down towards the year-to-date lows near 0.6520. Buying puts allows for defined risk while capturing potential downside, especially with volatility expected to rise around next week’s RBA announcement.
For those who are less certain on direction but expect a significant price move after the RBA meeting, a long straddle strategy could be effective. This involves buying both a call and a put option at the same strike price, profiting from a large swing in either direction. Historically, RBA meetings have caused AUD/USD to move by an average of over 60 pips on the day of the announcement, making a volatility play attractive.
