The effects of the RBA’s monetary tightening are starting to show. Australian macro data is weakening, and the economic surprise index is trending lower. Nevertheless, the AUD/USD pair remains supported by several bullish drivers. Let’s analyze the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Markets do not expect a cash rate hike.
- Australia’s economy is losing momentum.
- China and rising stock markets are likely to boost the Aussie.
- Consider buying AUDUSD if it breaks through 0.7080.
Weekly Fundamental Forecast for Australian Dollar
The RBA may be nearing the end of its tightening cycle. After raising rates at its last three meetings, the central bank is widely expected to stay on hold. Just a week ago, markets were fully pricing in another round of monetary tightening in 2026. Today, traders see only a 50% chance of such a move. Expectations of a more cautious message from the RBA are also capping gains in AUD/USD.
The economy is cyclical. When it overheats, inflation tends to accelerate, forcing central banks to raise interest rates. Higher rates curb spending, slow the labor market, and eventually bring inflation back toward target. In Australia, the RBA’s aggressive rate hikes, elevated gasoline prices amid tensions in the Middle East, and persistent inflation have put increasing pressure on households.
Citi Economic Surprise Index and Australian Bond Yields
Source: Bloomberg.
This is evident in the rise in unemployment to its highest level in 4.5 years and the decline in Australia’s Economic Surprise Index. Against this backdrop, another rate hike would risk putting even more pressure on an already slowing economy. As a result, markets have largely abandoned expectations of further RBA tightening. Still, not everyone agrees. Citigroup and UBS argue that persistently high inflation could force the central bank to resume the tightening cycle that began in August.
The RBA’s tightening cycle is likely over. However, that does not necessarily undermine the AUD/USD pair, as some investors fear. The Fed is unlikely to raise rates further, as high Treasury yields already provide additional monetary restraint. Moreover, if inflation proves to be temporary, the Fed may begin easing policy before the end of the year. Combined with mounting concerns about the central bank’s independence, this could weaken the US dollar.
US Fed Interest Rate and Treasury Yield
Source: Bloomberg.
The Australian dollar continues to benefit from two additional tailwinds: the rally in US stock indices, which is boosting global risk appetite, and the strength of the Chinese yuan. Morgan Stanley expects the S&P 500 index to reach 8,000 by the end of 2026, while Citigroup forecasts a rise to 8,100.
The renminbi has climbed to its highest level against the greenback since February 2023. The move has been supported in part by growing confidence in China’s ability to compete with the US in AI. At the same time, many investors believe Chinese stocks remain significantly undervalued, particularly relative to their US peers.
Weekly AUDUSD Trading Plan
While AUDUSD has lost its interest-rate advantage, other bullish drivers remain firmly in place. Thus, consider opening long positions once the price breaks above the resistance of 0.7080.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
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