The Reserve Bank of Australia sees an elevated risk that inflation expectations could rise, which may require a deeper slowdown in the economy. Oil price shocks are expected to add inflation pressure over the next year, shaping the backdrop for AUD/USD.
Rising oil prices are projected to contribute about 0.4 percentage points to underlying inflation in the quarter to March 2027. After that, underlying inflation is expected to ease and headline inflation to fall, linked to lower oil and travel prices.
Inflation Expectations In Focus
The RBA is working to keep inflation expectations near the midpoint of its 2–3% target range. Higher fuel prices linked to the Iran conflict are feeding into travel, transport, postal services, groceries and construction costs.
The RBA has lifted interest rates three times this year to 4.35%. It is watching how fast firms pass higher costs on to consumers, as broader pass-through could lift inflation expectations.
Minutes from the latest meeting pointed to a possible pause after three consecutive rises. The RBA said financial conditions would probably be somewhat restrictive and give the board time to assess the Middle East conflict and domestic responses.
Baseline forecasts assume a 60bp cash rate rise in 2026 and a gradual easing of oil prices. Trading partner growth is assumed to stay stable, supported by AI investment.
Implications For Audusd
The Reserve Bank of Australia is signaling that the risk of inflation expectations getting out of control is high, which may require a bigger economic slowdown to fix. We have already seen three rate hikes in 2026, bringing the cash rate to 4.35% to combat this pressure. The latest data from the Australian Bureau of Statistics showed quarterly CPI inflation holding firm at 4.1%, justifying the bank’s hawkish concern.
A primary driver of this inflation is the shock to oil prices, which are expected to add a material 0.4 percentage points to underlying inflation over the coming year. With Brent crude oil futures currently trading near $95 a barrel, these costs are feeding directly into everything from transport to groceries. We are closely watching how quickly businesses pass these expenses on to consumers.
Despite the tough talk, the minutes from the last RBA meeting suggested a potential pause after the recent series of hikes. This puts derivative traders in a data-dependent mode, where upcoming employment and inflation figures will be exceptionally important for the next rate decision. The latest labour force data showed the unemployment rate ticking up to 4.0%, which could give the board a reason to hold steady.
This is a notable shift from the environment we saw through most of 2025, when it appeared the inflation fight was nearly over and a clear disinflationary trend was in place. The current conflict in the Middle East has reversed some of that progress, forcing the RBA to adopt a more aggressive tone this year. This renewed uncertainty has increased expected volatility in the Australian dollar.
For traders, this elevated uncertainty between a hawkish RBA and a slowing economy suggests using options to define risk. Buying AUD/USD put options could be a way to position for a scenario where global growth fears or a domestic slowdown outweigh the RBA’s inflation concerns. Conversely, call options could offer upside exposure if inflation data comes in surprisingly hot, forcing the bank into another rate hike.
