AUD/USD extended its decline for a third session, trading near 0.7130 in Asia and holding just above the prior day’s weekly low. The Australian dollar is under pressure as markets scale back expectations for further tightening by the Reserve Bank of Australia, while the US dollar strengthens. Australian inflation eased, with headline CPI slowing to 4.2% year on year in April from 4.6% in March, and this followed weaker labour indicators including a higher unemployment rate and a drop in employment, leaving traders close to pricing out a June RBA rate rise.
Geopolitical tensions also supported the greenback after US strikes in Iran targeted a military site, and US forces shot down multiple Iranian drones near the Strait of Hormuz. Crude oil rebounded modestly, feeding inflation concerns and reinforcing expectations of higher US rates: CME FedWatch showed nearly a 50% chance of a hike in December, while January was priced at 60%. That backdrop helped lift the US Dollar Index to a fresh weekly high, even as markets looked ahead to US preliminary GDP and the PCE Price Index for further direction.
Central Bank Divergence and the Bearish Outlook for AUD/USD
Given the continued pressure on the AUD/USD, we see the path of least resistance remaining to the downside in the coming weeks. The divergence in central bank policy is the key driver, with the Reserve Bank of Australia clearly on hold while the Federal Reserve remains hawkish. This fundamental backdrop supports a bearish outlook for the currency pair.
The data confirms our view, as Australia’s latest quarterly CPI print came in at 3.8% year-over-year, reinforcing the idea that the RBA’s tightening cycle is complete. Furthermore, the unemployment rate ticked up to 4.1% last month, giving the central bank little reason to consider further hikes. This contrasts sharply with the situation in the United States.
In the US, last week’s Core PCE Price Index, the Fed’s preferred inflation gauge, printed at 2.8% year-over-year, which remains stubbornly above the 2% target. Consequently, the CME FedWatch Tool now shows a 70% probability of at least one more 25-basis-point rate hike by the September meeting. Persistent geopolitical tensions in the Middle East also continue to support the US Dollar’s safe-haven status.
Derivatives Strategies and Key Event Risks
For derivative traders, we believe buying out-of-the-money put options on the AUD/USD offers a favorable risk-reward profile to position for a further slide. We are looking at targeting strikes around the 0.7000 psychological level, with expirations in the July-August window to allow time for the theme to play out. This strategy provides a defined-risk way to capitalize on expected downside.
Implied volatility has been creeping higher amidst the uncertainty, making long option positions more expensive but also reflecting the potential for larger price swings. For a more cost-effective approach, we are also considering bear put spreads. This would involve buying a put at a strike like 0.7100 and selling a lower-strike put, such as 0.6950, to reduce the initial premium paid.
The primary risk to this bearish stance is any unexpected strength in upcoming Australian employment or trade data, which could force a hawkish reassessment from the RBA. Historically, this level of policy divergence between the RBA and the Fed has often preceded sustained downside for the pair. We saw a similar dynamic in 2022 that resulted in a multi-month decline, a pattern we feel could repeat.
