The Aussie Dollar extends its multi-week recovery, finally reclaiming the key 0.7100 hurdle and beyond against the US Dollar. Indeed, AUD/USD is gaining momentum and appears to be heading higher, with the 0.7200 barrier ahead of yearly peaks. In the meantime, the RBA’s cautious stance and still sticky domestic inflation are likely to underpin the Aussie during occasional bouts of weakness.
The Australian Dollar (AUD) extends Friday’s marked advance vs. the US Dollar (USD) in quite a promising start to the new trading week, prompting AUD/USD to reclaim the area above 0.7100 the figure for the first time since early June.
Indeed, the pair’s upbeat tone comes amid further deterioration of the sentiment surrounding the Greenback, all against the backdrop of declining bets for a Fed rate hike at its meeting next month. In addition, steady scepticism regarding the Middle East conflict seems to have been set aside in light of the lack of prominent news as of late.
Contributing to the marked rebound in spot, the Aussie Dollar appears well supported by the Reserve Bank of Australia’s (RBA) latest hawkish hold on August 11, which matched the broader consensus and kept the possibility of extra tightening on the table.
Australia’s domestic backdrop remains resilient
The Australian economy does look healthy and stable altogether and, honestly, in much better shape than many of its G10 peers.
This performance appears underpinned by a solid domestic demand and pretty decent figures when it comes to economic growth. The spectre of sticky inflation seems to justify the cautious and data-dependent stance from the RBA.
Contributing to the healthy fundamentals, domestic business activity remained in the expansion territory in July, after the final prints from the Purchasing Managers’ Index (PMI) showed Manufacturing at 52.0 (from 51.5) and Services at 53.6 (from 50.5).
Adding extra shine, the latest trade balance figures showed an A$1.929 billion surplus in June, reversing May’s A$2.367 billion deficit. However, the latest Gross Domestic Product (GDP) data disappointed expectations after the economy expanded by 0.3% QoQ in Q1 2026 (from 0.9%) and 2.5% YoY, matching the Q4 2025 expansion.
Meanwhile, the labour market remains firm. Indeed, the Unemployment Rate held steady at 4.4% in June, and the Employment Change increased by 76.3K individuals (from the revised 44K gain seen in the previous month).
Regarding inflation, June data was slightly below expectations, briefly raising speculation that the RBA might keep its hand steady for now. Despite the pace of disinflation remaining weak, direction still appears broadly correct.
Somehow reinforcing that view, the latest Melbourne Institute’s Consumer Inflation Expectations eased to 4.7% in July (from 5.5%).
For the RBA, that means the job is still incomplete, as policymakers continue to signal that inflation may only return to target at some point early in 2028, keeping the focus firmly on patience rather than any imminent pivot.
Looking ahead, investors now expect the central bank to tighten its monetary policy by just over 4 basis points by year-end, while it should keep its OCR unchanged at its September 29 gathering.
China offers stability rather than momentum
China now looks more like a stabilising force than the tailwind it usually provides to the Australian economy.
Let’s see some numbers: the economy expanded by 4.3% YoY in the April-June period, while Retail Sales gained just 0.6% in the year to July. In addition, Industrial Production eased its traction and expanded by 4.5% during the last month.
Of note is the strong recovery of the trade balance, with June’s surplus widening to $125.62 billion from $105.4 billion in the previous month, with both imports and exports expanding markedly.
However, the latest business activity gauges left investors scratching their heads after the National Bureau of Statistics (NBS) reported the Manufacturing PMI at 49.2 in July (from 50.3) and Services at 49.0 (from 50.2). Contrasting with those official readings, private measures like RatingDog remained in expansionary territory last month, with Manufacturing at 50.9 (from 51.7) and Services at 50.4 (from 54.1).
The disinflationary trend in China seems to have re-emerged after the CPI disappointed expectations and rose by just 0.5% in the year to June (from 1.0%). On a monthly basis, prices dropped by 0.1%, while Producer Prices gained 3.5% over the last twelve months, easing from the 4.1% annual gain recorded in the previous month.
Regarding monetary policy, the People’s Bank of China (PBoC) is widely anticipated to leave its Loan Prime Rates (LPR) unchanged at 3.00% for the one-year tenor and 3.50% for the five-year tenor at its meeting later in the week.
In summary, China is no longer pushing growth higher, but it is not dragging it down aggressively either. It is simply keeping things steady.
RBA keeps the door open to further tightening
The RBA left its Official Cash Rate (OCR) unchanged last week but retained a clear tightening bias as inflation remains too high and risks are skewed to the upside. In addition, the decision to hold rates was unanimous.
Furthermore, the bank judged monetary policy to be somewhat restrictive following three rate increases this year. However, the Board discussed another increase, and Governor Michele Bullock confirmed that a rate cut was not considered. She said a further hike remained a possibility if incoming data showed persistent inflation pressure.
Back to inflation, the Trimmed Mean is forecast at 3.3% in Q4 2026, remaining above 3% until mid-2027 before falling towards 2.5% by early 2028. The bank expects headline inflation at 3.6% in Q4 2026, 2.6% in Q4 2027 and 2.4% in Q4 2028. That said, short-term inflation expectations have eased but remain higher than earlier in the year.
Shifting to the labour market, it is still considered slightly tight, with only limited near-term easing expected. The jobless rate is projected to rise from 4.5% in Q4 2026 to 4.7% in Q4 2027 and 4.8% in Q4 2028. On this, Bullock stressed that slower economic growth and reduced labour-market tightness were necessary to bring inflation sustainably back to target.
Finally, the RBA expects subdued growth, with GDP expanding by 1.4% in Q4 2026, 1.6% in Q4 2027 and 1.8% in Q4 2028. Although the housing market has weakened more than anticipated, Bullock said this would not prevent the Board from raising rates.
Overall, the meeting delivered a hawkish hold. The RBA is waiting for more information, but another rate increase remains a possibility, while rate cuts are not being considered for now.
AUD/USD outlook: Three possible paths
Base case
While above its key 200-day SMA, near 0.6930, the pair’s outlook is expected to remain tilted to further advances. However, for such a scenario to materialise, it needs a strong catalyst to emerge and is heavily dependent on the broader backdrop: without a sustained improvement in risk sentiment or continued US Dollar weakness, the probability of extra gains could start to lose momentum.
Bull case
Further conviction is needed. If risk appetite gathers serious pace, spot should first leave behind the key 0.7100 barrier with solid conviction to face the next hurdle at the 0.7200 yardstick, all before reaching the 2026 ceiling near 0.7280. Up from here comes the minor 0.7300 barrier. Further up, the 2022 peak at 0.7593 is still in place.
Bear case
In case the global sentiment deteriorates, the Greenback gains extra momentum, or Chinese data continue to disappoint, spot could recede further and initially challenge its provisional 55-day SMA around 0.7000, prior to the critical 200-day SMA near 0.6940. The loss of this zone could lead to a renewed wave of bearish moves in the short term.
Australian Dollar: Bears return, but broader selling momentum stabilises
Speculative sentiment towards the Australian Dollar weakened again in the week ending August 11, according to the Commodity Futures Trading Commission (CFTC) latest report. That said, net shorts widened to around 39.2K contracts, while the weekly change swung back to -6.0K contracts after the prior week’s nearly 6.8K improvement, effectively reversing much of that short-covering move.
The renewed deterioration came alongside a sizeable increase in participation, with open interest rising to 267.2K contracts (from 240.5K). In addition, Speculative Exposure slipped to -14.7% from -13.8%. Rising open interest alongside deeper net shorts suggests bearish positions are once again being added rather than the move being driven purely by the liquidation of existing longs.
The broader picture is more stable, however. The 4-week change was virtually unchanged at around -8.5K contracts, showing that the cumulative deterioration in positioning has stopped accelerating. The Net Position Percentile also fell down to 68.5, and the Speculative Exposure Percentile is still high at 80.4. This indicates that the bearish exposure is still significant but not going into a new historical extreme.
Overall, the latest figures suggest that the improvement seen a week earlier was short-lived, with bearish conviction towards the Aussie returning as participation increased. Still, the stabilisation in 4-week momentum points to a more mature bearish positioning environment: investors remain firmly negative on the AUD, but so far there is little evidence of a renewed acceleration in the broader selling trend.
Key catalysts and risks ahead
In the near term, dynamics around the Greenback, global risk sentiment, and geopolitics remain the main focus. Those remain the key drivers of price action. On the domestic calendar, Tuesday’s release of the Consumer Confidence gauged by Westpac will be in the spotlight.
Looking at the broader picture, potential risks include a sharper slowdown in China, a persistently cautious Fed, a change in investors’ risk sentiment, or any shift in the RBA’s current cautious stance. Any of these could quickly destabilise the Australian currency in the near term.
Technical landscape
In the daily chart, AUD/USD trades at 0.7109, maintaining a constructive bullish bias as spot holds clearly above the 55-, 100- and 200-day simple moving averages (SMAs) clustered between 0.6940 and 0.7061. Immediate price action is underpinned by nearby support at 0.7079, while the Relative Strength Index (RSI) at 65.6 leans toward overbought territory, hinting that upside momentum is strong but potentially stretched, with the subdued Average Directional Index (ADX) around 11.9 suggesting the broader trend remains relatively weak despite the recent advance.
On the downside, initial support is seen at 0.7079, followed by the 100-day SMA at 0.7061 and the 55-day SMA near 0.7003, with the 200-day SMA at 0.6940 reinforcing a deeper demand area ahead of horizontal levels at 0.6833 and 0.6660. On the topside, bulls face initial resistance at 0.7283, with a break above this barrier exposing the next significant hurdle at 0.7661.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Broader outlook stays constructive despite external headwinds
The Aussie remains constructive on the bigger picture, but the path higher is getting tougher.
Australia’s domestic background continues to compare favourably with that of many advanced economies, and the RBA is in no rush to abandon its mildly hawkish bias.
However, the ongoing recovery remains exposed to bouts of strength from the US Dollar, steady geopolitical uncertainty and a Chinese economy that is stabilising rather than accelerating.
For now, the 200-day SMA remains the key zone. Holding above that level keeps the broader bullish structure intact, but a convincing break above 0.7100 will likely require further deterioration of the sentiment surrounding the Greenback, a more convincing and upbeat mood in the risk-linked complex, extra cooling of US inflation or a dovish turn from the Fed.
Until then, expect the AUD to be more driven by outside forces than domestic fundamentals.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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