The Reserve Bank of Australia surprised many by keeping interest rates steady at 3.85% this week instead of cutting them, despite a 90% likelihood of a rate cut in the market. Now, the market expects an 87% chance of a rate cut in August. This choice caused the AUD/USD to reverse and test last week’s highs. The rise of the Australian dollar is fueled by a positive outlook for risk appetite, as US equity indexes are approaching record highs. Additionally, the market seems unaffected by threats of US tariffs. If the AUD/USD breaks above July’s highs, it would hit its best levels since November, aiming for the September 2024 high of 0.6942. The pair has already crossed the 61.8% retracement level from the decline between September ’24 and April ’25, indicating that there may be room for further gains. We should pay attention to Chinese economic data for more positive indicators. However, we should remain cautious about a possible hawkish shift in the US dollar, especially if US economic data, particularly employment figures, stays strong. Currently, the Reserve Bank’s monetary tightening seems to be on hold, catching traders off guard who anticipated a rate cut. Instead of reacting negatively, the markets adapted quickly, leading to a rally in AUD/USD. This rally reflects renewed buying interest and risk-taking behavior. This upward movement isn’t happening alone. US equities are also rising towards record levels, contributing to a sense of optimism that is boosting currencies like the Australian dollar. The market appears largely indifferent to past trade war concerns from the US, with tariff threats not affecting risk appetite at the moment. A significant development was the clear break above the 61.8% Fibonacci level from last September to this spring’s decline, which often signals a return to previous highs. If this uptrend continues beyond recent peaks, the next target looks to be the intraday high from late Q3 last year. With August rate expectations still around 87%, rate adjustments remain a key topic. We’re closely monitoring two factors: first, data from China, particularly in industrial activity and consumption, which could further support the AUD/USD pair; and second, the tone of upcoming US employment reports. Strong US labor market signals could make it harder for the dollar to weaken, prompting markets to reconsider a more hawkish stance for US rates. With these considerations, the path for AUD/USD may not be straightforward. Further gains depend on sustained positive sentiment and no surprises from US economic data. Any rise in Treasury yields due to better-than-expected data could quickly slow momentum, and it wouldn’t take much to strengthen the dollar again. As always, we’re being cautious and adjusting our options based on rate expectations and technical levels. We’ll keep a close eye on market direction, particularly if volatility increases from today’s low levels. Timing our entries around China’s inflation and manufacturing data could present good trading opportunities, provided current trends continue. While short-term support is strong for now, sentiment could change rapidly with a single data release.

here to set up a live account on VT Markets now