AUD/USD fell to about 0.7040 on Friday, down 0.46% on the day. It had reached a multi-year high of 0.7187 earlier in the week, before retreating as the US Dollar strengthened and risk appetite weakened. In the US, the PCE Price Index eased to 2.8% year on year in January from 2.9% in December, below expectations. The index rose 0.3% month on month, while core PCE increased 3.1% year on year, in line with forecasts.

Dollar Strength And Softer Risk Appetite

US GDP growth for the fourth quarter was revised down to 0.7% year on year from 1.4%. The US Dollar Index moved above 100 as US Treasury yields rose and markets reassessed the policy outlook. Tensions around the Strait of Hormuz raised concerns about energy supply, with Brent near $100 a barrel and WTI close to $95. Markets reduced expectations for Federal Reserve rate cuts, with MUFG estimating each $10 rise in oil could add about 0.2 percentage points to US inflation. In Australia, Consumer Inflation Expectations rose to 5.2% in March, the highest since July 2023. Markets price a possible RBA rate rise at the 17 March meeting, but the firmer US Dollar weighed on the pair. Looking back to early 2025, we saw AUD/USD pull back sharply as the US dollar strengthened on risk aversion, a pattern that feels familiar today. The pair is currently trading near 0.6815, and this history suggests that any rallies toward the 0.7000 level will likely meet significant resistance. Traders should be cautious about taking long positions, as the broader market sentiment remains fragile. In 2025, a downward revision to US GDP did little to dent dollar strength because inflation concerns were overriding. We are seeing an echo of that now; the latest US Core PCE data for February 2026 came in at a sticky 2.5%, which is keeping the Federal Reserve from committing to further rate cuts. This environment favors derivatives strategies that benefit from a stronger, or at least stable, US dollar.

Energy Prices And Inflation Hedging

We remember well when escalating tensions pushed Brent crude near $100 a barrel last year, which delayed the Fed’s easing cycle. Today, with Brent holding firm around $85 a barrel after OPEC+ extended its production cuts through the second quarter of 2026, those inflationary risks have not disappeared. This suggests buying call options on energy exchange-traded funds (ETFs) could be a wise hedge against another inflation scare. Last year, even with the Reserve Bank of Australia signaling rate hikes, the Aussie dollar weakened under the pressure of global risk-off sentiment. Today, the RBA is holding its cash rate at 4.50% while Australian quarterly inflation persists at 3.6%, creating a difficult backdrop for the currency. This policy divergence with a more resilient US economy means using options to bet against the AUD/USD pair on any strength remains a viable trade. Given the push and pull of sticky inflation and central banks on hold, a rise in market volatility seems likely in the coming weeks. The CBOE Volatility Index (VIX) is currently near 15, a relatively calm level compared to the spikes seen during the geopolitical uncertainty of 2025. Buying straddles on the AUD/USD pair could be an effective way to profit from a decisive move, regardless of the direction. Create your live VT Markets account and start trading now.

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