AUD/USD fell for a second straight session and traded near 0.7110 in Asia on Friday. Further losses may be limited if the Australian Dollar strengthens, as markets expect a cautious Reserve Bank of Australia (RBA).
Markets expect the RBA to keep the cash rate at 3.85% at the March meeting. Policymakers will not receive the full Q1 inflation report until late April, and Governor Michele Bullock has said patience is still appropriate, with the economy close to balance.
Rba Policy Expectations
A stronger January inflation reading has raised expectations of a possible RBA rate hike in May. Markets are pricing in about 40 basis points of additional tightening this year, while many analysts see the peak rate near 4.10%.
The pair may also find support if the US Dollar stays under pressure due to uncertainty over US trade policy. Traders are watching the US January Producer Price Index release later on Friday for clues on Federal Reserve policy.
President Donald Trump said he plans a blanket 15% tariff on imports after a Supreme Court ruling struck down his earlier reciprocal tariff approach. US Trade Representative Jamieson Greer said tariffs could rise to 15% or more for several countries in the next few days.
Around this time in 2025, markets also expected the RBA to be patient. The focus was on possible US tariffs and an RBA peak rate of 4.10%. Those tariffs did materialize and significantly changed the outlook for the US Dollar.
Current Backdrop And Market Positioning
Today’s situation is very different. The RBA is now signaling a clear bias toward easing. The latest quarterly inflation data from the Australian Bureau of Statistics shows CPI has fallen to 3.1%, down sharply from the 2025 highs. Markets are now pricing in a 75% chance of a rate cut by the May 2026 meeting.
Meanwhile, the US is still dealing with the inflation impact of the 15% blanket tariff introduced last year. The latest Core PCE data from the Bureau of Economic Analysis remains above 3.5%, which is pushing the Federal Reserve to keep policy restrictive. This gap in policy direction is a major headwind for AUD/USD.
Over the next few weeks, this setup favors strategies that benefit from a weaker or range-bound AUD/USD. Volatility may rise around the upcoming RBA meeting, which could make long put options on the Australian dollar an attractive hedge. Selling call spreads may also help capture limited upside in the pair.
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