AUD/USD rose 0.5% to about 0.7015 in early European trading on Monday. It rebounded after a two-day sell-off as the Australian dollar gained on expectations of an interest rate rise by the Reserve Bank of Australia (RBA) on Tuesday. The RBA is expected to lift the Official Cash Rate by 25 basis points to 4.1%. In February, it raised the rate by 25 basis points to 3.85% and signalled further rises due to inflation risks.

Oil Prices And Inflation Expectations

Oil prices have risen in recent weeks after the closure of the Strait of Hormuz during Middle East conflicts involving the US, Israel, and Iran. Higher oil prices have also pushed up inflation expectations globally. The US dollar eased after a strong rally ahead of the Federal Reserve decision on Wednesday. The Fed is expected to keep rates unchanged at 3.50%–3.75%. AUD/USD is near 0.7015 and sits close to the 20-day exponential moving average at about 0.7053. The 14-day RSI is between 40.00 and 60.00 after dropping from the 60.00–80.00 range. Resistance is near 0.7100, with a cap at 0.7120–0.7150, and a break could target the mid-0.72s. Support levels are 0.6944, then 0.6900, with downside risk towards 0.6770–0.6800 if it falls further.

Market Context Then And Now

We remember the setup in March of last year, when expectations of a hawkish Reserve Bank of Australia had the AUD/USD pushing above 0.7000. The market was betting on rate hikes to combat inflation, which was being fueled by a spike in oil prices. Today, the picture is quite different, with the pair struggling to hold ground near 0.6650 as rate cut speculation grows. The RBA did follow through with hikes in 2025, but with Australia’s latest quarterly inflation figures cooling to 3.1%, we now see the market pricing in at least one rate cut by the end of this year. In contrast, the US Federal Reserve remains cautious with rates holding at 4.00-4.25%, as core services inflation proves stickier than anticipated. This widening interest rate differential in favor of the US dollar creates a significant headwind for any AUD/USD rallies. While the geopolitical oil shock of 2025 was a primary driver for the Aussie then, that pressure has since eased. We are now more focused on key industrial commodity prices, and recent data shows iron ore futures have slipped over 15% this quarter on weaker global demand forecasts. This weighs heavily on Australia’s terms of trade and puts a natural cap on the currency’s strength. Given this backdrop, we should consider positioning for further downside or limited upside in the AUD/USD over the coming weeks. Buying put options with strike prices around 0.6600 could offer a cost-effective way to profit from a break of current support levels. For those less bearish, selling out-of-the-money call options with a strike near 0.6800 allows for collecting premium while defining a clear resistance point we do not expect to be breached. Create your live VT Markets account and start trading now.

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