AUD/USD initially rose after a softer US core CPI print, but stalled ahead of 0.7050 and then slid through the US session to end just under 0.7000, its weakest close since April and almost 300 pips below the May peak. Washington’s threat to resume strikes on Iran darkened sentiment later in the day, yet earlier data from China set the tone by suggesting higher energy costs are being absorbed through corporate margins rather than passed on to consumers.
China’s CPI came in at 1.2% YoY and fell 0.1% on the month, while PPI accelerated to 3.9%, pointing to input-cost pressure alongside soft demand. Australia’s exposure to LNG and coal supports its terms of trade, but demand risk rises if Chinese producers cut output and imports; Chinese retail sales were running at 0.2% YoY ahead of Tuesday’s 02:00 GMT update with industrial production. Domestically, the RBA lifted the cash rate to 4.35% in May on an eight-to-one vote; monthly CPI hit 4.6% in March, underlying inflation is forecast near 3.9% this quarter, and expectations sit at 5.6% ahead of Thursday 01:00 GMT. The Fed is at 3.50% to 3.75%; key levels include 0.6950 support, the 200-day EMA near 0.6900, resistance near 0.7050 and the 50-day EMA just above 0.7100, with China data at 02:00 GMT next Tuesday preceding the RBA decision at 04:30 GMT and a press conference an hour later.
Commodity Tailwinds Versus Chinese Headwinds
The Australian Dollar has the tailwind of strong commodity prices but is flying into the headwind of a weak customer. We saw the currency pop after last week’s softer US jobs data, but the rally stalled near 0.6720 and has since bled back towards 0.6650. This price action shows that even with supportive global news, the Aussie’s fundamental problem remains its biggest buyer.
That problem is the ongoing margin squeeze in China, which caps the Aussie’s potential. Fresh data for May 2026 showed Chinese consumer prices rose a meager 0.5% year-over-year, while producer prices climbed 1.5%, highlighting the pressure on factory profits. When Chinese producers can’t pass on costs, they eventually cut back on orders for raw materials, which is a direct hit to Australian export demand.
We see this playing out in real-time, with iron ore prices hovering around $115 a tonne, a level that should be very supportive for the AUD. However, recent Chinese industrial production figures missed expectations, confirming that demand is simply not strong enough to absorb high commodity prices. Essentially, Australia is selling premium goods to a customer who is on a tight budget.
Domestic Strength Clashes With External Weakness
On the domestic front, the story appears much stronger, which is what makes the situation so frustrating. The Reserve Bank of Australia is holding its cash rate at 4.10% as underlying inflation remains sticky at 3.2%, well above their target band. This hawkish stance should be a major source of strength for the currency.
However, with the US Federal Reserve holding its own rate at a higher 4.50-4.75%, the positive yield gap the Aussie once enjoyed over the dollar has vanished. This removes a key incentive for international investors to buy and hold the currency. The entire bullish framework of a hawkish RBA and firm commodity prices is colliding with a customer that has stopped spending and a yield that is no longer attractive.
This leaves us with a corrective bias for the coming weeks. Reclaiming the 0.6720 level seems unlikely without a significant improvement in Chinese economic data. Instead, we see bounces toward that zone as opportunities to position for further weakness, with key support sitting near the 0.6580 mark.
