AUD/USD rose 0.2% to about 0.7110 in Asian trade on Tuesday, as the Australian Dollar outperformed after comments from RBA Governor Michele Bullock. She said the board is uncertain whether financial conditions are restrictive enough to return inflation to the midpoint of the target within a reasonable timeframe. Bullock also referred to rising inflation pressures linked to the war in the Middle East, and said the central bank is positioned to respond. In February, the RBA lifted its Official Cash Rate by 25 basis points to 3.85% and left scope for further tightening.

Dollar Supported By Safe Haven Demand

The US Dollar stayed broadly firm on safe-haven demand amid the war involving the United States, Israel, and Iran. Factory-gate inflation data also supported expectations that the Federal Reserve will keep rates steady in the near term. The ISM Manufacturing PMI showed the Prices Paid sub-index jumped to 70.5, versus 59.5 expected and 59.0 previously. Technically, AUD/USD is holding above the rising 20-day EMA, while the 14-day RSI remains above 60.00. Support is seen at 0.7050, then 0.7000 and the February 6 low near 0.6900. Resistance is around the three-year high at 0.7150, with 0.7200 above that. Looking back to early 2025, we were positioned for a fresh upside move in AUD/USD above 0.7150, driven by a hawkish Reserve Bank of Australia. That bullish momentum we saw ultimately stalled, as the global economic picture shifted throughout the year. The pair failed to hold those highs and has since established a much lower trading range.

Rate Differentials And China Risks

The RBA did follow through on its hawkish stance, eventually lifting its Official Cash Rate to 4.35%, where it remains today. However, with the latest quarterly inflation figures now moderating to 3.4%, the urgency for further hikes has disappeared. The central bank is now in a clear holding pattern, removing a key pillar of support for the Aussie dollar. Meanwhile, the US Federal Reserve has also held its policy rate firm in the 5.25-5.50% range, creating a significant interest rate advantage for the US dollar. This rate differential, which heavily influences currency flows, continues to pressure the AUD/USD pair, which is currently struggling around the 0.6600 level. The safe-haven demand for the dollar also remains a background theme, given ongoing global tensions. Adding to the headwinds for the Australian dollar are persistent concerns about the economic health of its largest trading partner, China. Recent data, like the Caixin Manufacturing PMI coming in just under the expansionary 50 mark at 49.5, reinforces a cautious outlook on demand for Australian commodities. This acts as a cap on any potential rallies for the Aussie. Given this environment, we believe the upside for AUD/USD is limited in the coming weeks. Traders should consider selling out-of-the-money call options to collect premium, targeting strikes around the 0.6750 level. This strategy benefits from range-bound price action or a slow grind lower. The main risk to this view would be a surprisingly strong Australian inflation report or a sudden dovish pivot from the US Fed, which could cause a sharp spike in the pair. Therefore, managing position size is critical, and traders could use a portion of the premium collected from selling calls to purchase cheaper, further out-of-the-money puts as a hedge against an unexpected downturn. Create your live VT Markets account and start trading now.

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