AUD/USD resumed declines after failing near the 0.7180 supply zone, sliding to a fresh weekly low around 0.7135 during the European session despite a mildly softer US dollar. Crude Oil edged lower as markets factored tentative progress in US–Iran diplomatic talks, easing concerns over energy supply disruption. That dip helped pull US Treasury yields down, weighing on the greenback, yet the pair found little support as expectations for further tightening by the Reserve Bank of Australia faded.
Australian data reinforced that shift. The Australian Bureau of Statistics said headline CPI eased to 4.2% year on year in April from 4.6% in March; at the same time, the unemployment rate rose unexpectedly to 4.5% and employment fell. Traders are pricing about a 10% chance of a June hike, with expectations leaning towards a hold or one 25-basis-point move later in the year. Geopolitical risk remains a feature as Washington and Tehran clash over the nuclear programme and the Strait of Hormuz, and renewed US attacks on Iran dented hopes of ending a three-month-old war. Markets also price at least one 25 bps Fed hike in 2026, keeping downside pressure as attention turns to levels below 0.7100.
Policy Divergence and Weak Australian Data
We see the Australian dollar facing continued pressure after failing to hold gains around the 0.7180 level. This weakness is driven by the widening policy gap between a hesitant Reserve Bank of Australia and a more determined US Federal Reserve. We are therefore positioning for a further decline in the AUD/USD pair over the coming weeks.
The RBA is unlikely to raise rates in June, especially after Australian CPI recently slowed to 4.2% and unemployment ticked up to 4.5%. Fresh data released last week showed a 0.5% contraction in retail sales for April, reinforcing our belief that the Australian economy is cooling. This makes holding the Aussie dollar much less attractive compared to its peers.
Bearish Outlook and Strategic Positioning
In contrast, the US dollar should find support as recent data showed Core PCE, the Fed’s preferred inflation gauge, holding firm at 2.9% year-over-year. This keeps the pressure on for at least one 25 bps rate hike later in 2026. The latest Commitment of Traders report confirms this bearish Aussie sentiment, showing large speculators have increased their net short positions to over $5 billion.
Given this outlook, we are buying put options with July and August 2026 expirations to capitalize on the expected downside. We are targeting strike prices around 0.7100 and below, as we believe the pair will retest its monthly lows. This strategy provides a defined-risk way to profit from the anticipated move lower.
This setup, where the Fed looks to hike while the RBA is on hold, is historically negative for the AUD/USD. We saw a similar dynamic play out between 2014 and 2015, which resulted in a prolonged decline for the pair. The current market structure is showing similar early signs.
