Australian Dollar Price Forecast: Correction has further legs to go

The Aussie Dollar’s uptrend seems to have met some decent resistance in the 0.7270-0.7280 band so far, with AUD/USD still looking for a strong catalyst to extend its rally and dispute the yearly peaks and higher levels. In the meantime, the pair’s constructive outlook remains unchallenged for now, reinforced by elevated domestic inflation and the RBA’s hawkish approach.

The Australian Dollar (AUD) quickly fades Monday’s optimism, prompting AUD/USD to break below the key 0.7100 support, put its provisional 55-day SMA to the test, and hit new five-week lows.

That said, the pair’s marked retracement comes in response to extra safe-haven demand, which in turn props up the move higher in the US Dollar (USD), reaching monthly highs near 99.50 when tracked by the US Dollar Index (DXY). Furthermore, the Greenback’s firm tone remains well underpinned by rising bets that the Federal Reserve (Fed) might keep its cautious stance for longer, helped at the same time by unabated concerns stemming from the Middle East crisis.

Australia keeps grinding higher, but the cracks are becoming harder to ignore

The Australian economy does look healthy and stable altogether and, honestly, is 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 a sticky inflation seems to justify the cautious and data-dependent stance from the Reserve Bank of Australia (RBA), particularly following the latest meeting, where it raised rates to 4.35%, broadly in line with market expectations.

Supporting the above, the preliminary data from the Purchasing Managers’ Index (PMI) showed Manufacturing at 51.0 and Services at 50.3, both recovering and back to expansion territory in April. However, this bounce feels more like a slow grind higher than a meaningful pickup in activity… for now.

In the opposite direction, the latest trade balance figures showed an unexpected deficit of A$1.841 billion in March, markedly lower than the A$5.026 billion recorded in February. The Gross Domestic Product (GDP), meanwhile, showed the economy expanded by 0.8% QoQ and 2.6% YoY in late 2025.

On the not-so-bright side, the labour market seems to be somewhat cooling: the Unemployment Rate remained at 4.3% in March and the Employment Change slowed sharply to 17.9K from close to 50K recorded in the previous month.

Back to the thorny inflation issue: the latest Consumer Price Index (CPI) came in at 4.1% YoY, with both the Trimmed Mean and Weighted Median running at 3.5% YoY. Following these prints, any real sense of disinflation now appears dim.

For the RBA, that means the job is far from done, as policymakers continue to signal that inflation may only return to target around mid-2028, keeping the focus firmly on patience rather than any imminent pivot.

China is stabilising, but no longer carrying the region

China now looks more like a stabilising force than the tailwind it usually was for the Australian economy.

Let’s see some numbers: the economy expanded by 5.0% YoY in Q1, Retail Sales gained 1.91% since the beginning of the year and a meagre 0.2% in a year to April. In addition, Industrial Production disappointed expectations in last month after expanding by 4.1% from a year earlier and 5.6% YTD.

Of note is the sharp reduction of the trade surplus, which narrowed to just over $51 billion in March from nearly $214 billion previously, all in response to weaker demand dynamics.

However, business activity seems to be regaining traction after the National Bureau of Statistics (NBS) reported Manufacturing PMI at 50.3 in April, while Services slipped into contraction territory at 49.4. At the same time, private gauges such as RatingDog still point to expansion, with Manufacturing climbing to 52.2 and Services up to 52.6.

The disinflationary pressure in China has been losing steam, as the CPI rose 1.2% YoY in April, while Producer Prices jumped by 2.8% YoY, moving further away from deflation.

And what about the People’s Bank of China (PBoC)? Investors largely anticipate the central bank to keep the Loan Prime Rates (LPR) unchanged at 3.00% for the one-year tenor and 3.50% for the five-year tenor at its event early on Wednesday.

To sum up, China is no longer pushing growth higher, but it is not dragging it down aggressively either. It is simply keeping things steady.

The RBA still has inflation firmly in its sights

The RBA matched consensus earlier in the month, lifting its Official Cash Rate (OCR) by 25 basis points to 4.35%. The statement read like a central bank dealing with a more complicated world: the outlook has clearly worsened, with growth marked down and inflation pushed higher, leaving policymakers facing a more uncomfortable trade-off.

Inflation is now expected to stay higher for longer, with the CPI only returning to target around 2027–2028. At the same time, the GDP is set to run below trend, and the jobless rate is seen gradually drifting higher.

A big part of that shift comes from the oil shock linked to the Middle East conflict. The bank sees it as a hit to growth but also a fresh source of inflation pressure, exactly the kind of mix central banks dislike. There are even references to possible energy shortages if the situation drags on.

For now, though, there is little sign that demand has rolled over in a meaningful way, and underlying inflation pressures remain firm, with businesses increasingly expected to pass on higher costs.

In her press conference, Governor Michele Bullock sounded a bit more measured. The key message is that rates are now in restrictive territory, which gives the RBA some breathing space.

In her words, the bank can now afford to “sit and see”, taking time to assess how the shock plays out rather than rushing into further moves. That in itself feels like a shift in tone.

Still, the door to more tightening is not closed. Bullock made it clear that if higher costs start feeding into inflation expectations, the RBA would have to respond, potentially with higher rates.

Bullock also framed the situation quite bluntly, describing the oil shock as something that reduces real incomes and “makes us poorer”, while warning that even a quick resolution would not prevent higher costs from lingering.

The RBA Minutes released early on Tuesday were a very hawkish read, with most members still of the view that inflation was the greater danger even though there were signs that growth was slowing. Eight Board members felt the strongest case was for another 25 basis point rate hike, while only one preferred to wait for more data. There was also clear concern that core inflation could remain above target for too long, with some members warning that inflation expectations risk becoming deanchored if the Bank does not stay firm enough.

At the same time, the Board acknowledged that Australian economic growth is likely to stay below potential for a while and admitted monetary policy has limited ability to change the near-term inflation path, especially with geopolitical tensions and higher energy prices linked to the Gulf conflict clouding the outlook. Some members even argued that another rate hike would give the RBA more time to assess how households and businesses are coping with the evolving backdrop.

For markets, the broader message is that the RBA still looks a long way from turning dovish. Policymakers appear more worried about stubborn inflation than weaker growth, reinforcing the idea that interest rates may need to stay restrictive for longer. This should continue to lend some support to the Australian Dollar, particularly if inflation data to come remains sticky.

In the meantime, markets expect the RBA to keep its OCR unchanged at its June 16 gathering, while pencilling in roughly 37 basis points of extra tightening by year-end.

AUD/USD pushes higher, but conviction is still missing

Base case

The pair has managed to break above the key 0.7200 level before correcting, but it still feels heavily dependent on the broader backdrop. Without a sustained improvement in risk sentiment or continued US Dollar weakness, the move could start to lose traction.

Bull case

Further conviction is needed. If risk appetite picks up serious pace, spot could extend the uptrend and challenge the 2026 peak near 0.7280, just ahead of the minor 0.7300 barrier. Further up, the 2022 ceiling at 0.7593 awaits. Speculative positioning seems to be leaning toward this scenario.

Bear case

The loss of further momentum should not be ruled out in the current volatile context. If sentiment deteriorates, the Greenback picks up extra pace, or Chinese data keep disappointing, spot could recede further and dispute the key 0.7000 neighbourhood in the relatively short-term horizon.

The rally is there, although markets are still not fully convinced.

Speculators remain firmly supportive of the Aussie

According to the latest Commodity Futures Trading Commission (CFTC) data, speculative net longs in the Australian Dollar increased to levels last seen in late January 2013 near 85K contracts for the week ending May 12.

The move also came in tandem with the fourth consecutive increase in open interest, this time approaching 290K contracts.

It is worth recalling that speculators’ sentiment toward the Aussie shifted in late January following several years of being net short.

Despite the ongoing corrective move in spot, which, it must be said, it largely follows US Dollar dynamics, the prospect remains constructive, leaving the door open to further gains in the short-term horizon.

What markets are really watching for the Australian Dollar

In the near term, it is still all about the US Dollar, global risk sentiment, and geopolitics. Those remain the key drivers of price action. Next on tap in Oz will be the release of the preliminary S&P Global Manufacturing and Services PMIs for the current month, followed by the always relevant labour market report.

Key risks include a sharper slowdown in China, a more aggressive Fed, a change of heart from investors when it comes to risk sentiment, or any shift in the RBA’s stance. Any of these could quickly destabilise the Australian currency in the near term.

Technical landscape

In the daily chart, AUD/USD trades at 0.7115. The pair holds a constructive bias as it remains above the 55-day simple moving average (SMA) at 0.7089 and the 100-day SMA at 0.7012, while the 200-day SMA down at 0.6787 underpins the broader uptrend structure. Momentum has cooled, with the Relative Strength Index slipping to around 45 and the Average Directional Index hovering near 15, hinting at a pause in directional conviction rather than a full trend reversal while price respects these underlying supports.

On the downside, initial support emerges at the nearby horizontal level at 0.7102, followed by the 55-day SMA at 0.7089 and then the 100-day SMA around 0.7012. Below there, additional demand is seen at 0.6833 ahead of the 200-day SMA at 0.6787, with deeper supports lined up at 0.6660, 0.6593, 0.6414 and 0.6373. On the topside, the first meaningful hurdle is the resistance band starting at 0.7283, with a break above exposing the higher barrier at 0.7661.

(The technical analysis of this story was written with the help of an AI tool.)

Bottom line: supportive backdrop, uncertain conviction

The broader backdrop for the Australian Dollar remains supportive, and the RBA’s stance should continue to provide a degree of support on dips.

But this is still a currency that trades heavily on sentiment. When confidence is strong, the Aussie performs well. When uncertainty creeps in, the US Dollar tends to take over.

So while the medium-term story still leans constructive, the near-term outlook feels less certain. The move higher is there, but conviction is not quite there yet.