AUD/USD fell for a third straight day, trading near 0.7130 in Asian hours on Monday. The pair weakened after new data from China, a key Australian trading partner.
China’s Retail Sales rose 0.2% year-on-year in April, versus 2.0% expected and 1.7% in March. Industrial Production increased 4.1% year-on-year, compared with a 5.9% forecast and 5.7% previously.
Fixed Asset Investment was -1.6% year-to-date year-on-year in April, against an expected rise of 1.6%. The March reading was a rise of 1.7%.
The pair also slipped as the US Dollar strengthened after the US Federal Reserve shifted towards a more aggressive approach on inflation. Markets lifted the implied chance of a December rate rise to nearly 48%, up from 14% a week earlier, based on the CME FedWatch tool.
The US Dollar also gained on safe-haven demand linked to geopolitical tensions. The US and Iran remained far from an agreement to end weeks of fighting and reopen the Strait of Hormuz.
US President Donald Trump warned Iran to make progress or face new consequences. With the Strait effectively closed, oil prices continued to rise, adding pressure for energy importers.
Xi Jinping warned Trump that Taiwan could trigger direct clashes between the two economies. This added to market risk concerns.
The current weakness in the Australian dollar mirrors the situation we saw around this time in 2025, when disappointing Chinese economic data weighed heavily on the currency. China’s latest figures, reported on May 17, 2026, show industrial production growing by 5.6%, missing the 6.1% forecast and signaling continued sluggishness for Australia’s main trading partner. This reinforces the case for taking a bearish stance, suggesting traders could consider buying AUD/USD put options or establishing short futures positions.
Adding to the pressure is the strong US dollar, a theme that also dominated last year. The Federal Reserve continues to signal a “higher for longer” interest rate policy, with the latest inflation data showing core CPI at a stubborn 3.5%. According to the CME FedWatch Tool, markets are now pricing in less than a 50% chance of a rate cut before September 2026, keeping the greenback well-supported.
The geopolitical landscape remains tense, creating a demand for safe-haven assets like the US dollar. Lingering conflict in the Middle East is keeping Brent crude oil prices elevated above $85 a barrel, creating headwinds for global growth and risk-sensitive currencies like the AUD. This is reminiscent of the tensions over the Strait of Hormuz in 2025, which also bolstered the dollar at the expense of the Aussie.
Given the combination of weak Chinese data, a firm US dollar, and ongoing geopolitical risk, we expect volatility in AUD/USD to increase. Looking back at 2022 and 2023, similar conditions caused the currency’s volatility index to spike over 12%. Traders should prepare for larger price swings, potentially using options strategies like straddles to profit from this anticipated rise in volatility.
