The AUD/USD pair dropped to around 0.7000 after hitting a three-year high of 0.7094. This decline happened because Australia’s Producer Price Index (PPI) stayed the same at 3.5% year-over-year for Q4 2025, matching the previous quarter’s figure. Despite challenges, the Australian dollar is trading at about 0.7030. It could regain strength due to strong domestic inflation data, which raises the chances of a Reserve Bank of Australia (RBA) rate hike next week. Markets are indicating a 70% likelihood of a 25-basis-point increase.

Interest Rate Expectations

The RBA expects the cash rate to increase from 3.6% to 3.85% by May, potentially reaching 4.10% by September. Additionally, the US Treasury has criticized China for its external surpluses and undervalued exchange rate. Australia’s economy relies heavily on the price of iron ore, its largest export, and the health of its main trading partner, China. Various economic indicators, such as the Trade Balance, growth rates, and inflation, affect the AUD. A positive Trade Balance strengthens the Australian dollar, while a negative one has the opposite effect. With over a 70% chance of an RBA rate hike next week, we should prepare for a stronger AUD. This expectation, driven by higher-than-expected inflation last quarter, makes long AUD positions appealing. Options traders may want to consider buying call options on the AUD/USD to take advantage of a potential rise after the RBA’s announcement.

Federal Reserve Announcement

The upcoming announcement of a new Federal Reserve Chair brings uncertainty for the US dollar. President Trump’s preference for rate cuts suggests a shift towards a dovish policy, which could weaken the USD. A weaker dollar may help the AUD/USD pair, regardless of Australian factors. We should also keep an eye on China, Australia’s largest trading partner. US calls for a stronger Yuan can be beneficial for the Australian dollar, as it increases Chinese purchasing power for key exports, like iron ore. With iron ore prices stabilizing above $135 a tonne in late 2025, any signs of a stronger Yuan could support a bullish outlook for the AUD. The recent dip from the three-year high of 0.7094 offers a tactical chance. This pullback toward the key psychological level of 0.7000 could be a good entry point ahead of the anticipated RBA rate hike next week. We’re watching to see if the pair can find support here before continuing its upward trend. Create your live VT Markets account and start trading now.

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