AUD/USD edged up by a few pips after hitting a fresh two-month low in Asian trading on Thursday, reclaiming the 0.7000 level. The move came as the US Dollar softened following May’s US CPI release: headline inflation rose, while softer core gauges tempered fears of runaway price pressures.
Rate expectations in the US remain a constraint. Markets are still pricing a 70% chance of a Federal Reserve rate increase by year-end, with energy-price concerns tied to the Middle East conflict feeding into the outlook. The US military struck targets across Iran after President Donald Trump said more action would follow; Iran responded by announcing the closure of the Strait of Hormuz and warning of a crushing and decisive response. These developments risk extending a war now over three months old, a backdrop that could buoy crude oil and support the Greenback. Separately, reduced expectations for further Reserve Bank of Australia tightening may limit AUD demand, leaving attention on US PPI later today.
Australian Dollar Recovery Remains Fragile
We are seeing the Australian dollar bounce from its recent lows near the 0.6580 mark, but we view this as a temporary recovery. The broader economic picture suggests this upward move lacks strong support. Any rally toward the 0.6650 resistance level should be viewed with skepticism.
The US dollar is finding support as recent economic data complicates the Federal Reserve’s path forward. While the May 2026 CPI report showed inflation moderating slightly to 2.9%, it remains well above the Fed’s target, diminishing hopes for imminent rate cuts. Market pricing now suggests only a 40% chance of a single rate cut by the end of the year, a significant shift from a few months ago.
Global And Domestic Pressures Favor Bearish Strategies
At the same time, we see renewed trade tensions and concerns over slowing industrial demand from China weighing on sentiment. Iron ore prices, a key Australian export, have recently slipped below $100 per tonne for the first time in months, directly pressuring the Aussie dollar. This global uncertainty is pushing capital toward the relative safety of the US dollar.
In Australia, inflation remains a challenge, with the latest quarterly figures showing a stubborn 3.8% print. Despite this, the Reserve Bank of Australia appears to be on an extended pause, unwilling to hike rates further into a weakening domestic economy. This policy divergence with a still-hawkish Fed makes the Australian dollar less attractive.
Given this backdrop, we believe any strength in the AUD/USD pair is an opportunity to initiate bearish positions. For derivative traders, buying put options with a strike price below 0.6500 could be an effective strategy to profit from the expected decline over the coming weeks. We also see value in establishing bear put spreads to limit the initial cost while positioning for a downward move.
