Australian Dollar Price Forecast: Inflation hurts

The Aussie Dollar's recovery appears to have met some resistance just above the 0.7000 threshold against the US Dollar so far. Indeed, AUD/USD still struggles to surpass that mark in a convincing fashion, while the constructive outlook appears unchanged above its critical 200-day SMA around 0.6900. Looking at the broader picture, the RBA’s cautious stance and still sticky domestic inflation are also expected to underpin the Aussie in case of occasional bouts of weakness.

The Australian Dollar (AUD) trades markedly on the back foot on Wednesday, sparking a correction in AUD/USD to the low-0.6900s, or two-week lows.

The pair’s pickup of the selling pressure comes on the back of the resurgence of tensions in the Middle East, which remains surrounded by unabated uncertainty and constant scepticism by global markets.

That said, the US Dollar (USD) appears slightly bid, keeping the broader risk complex under downside pressure as markets gear up for the imminent FOMC gathering. On this, consensus among traders see the Federal Reserve (Fed) leaving its interest rates unchanged, although the main focus of attention should shift toward the subsequent Q&A session by Chair Kevin Warsh.

Australia’s economy keeps its footing

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 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 July Purchasing Managers’ Index (PMI) showed Manufacturing at 51.7 (from 51.5) and Services at 53.0 (from 50.5).

Removing some shine from the domestic fundamentals, the latest trade balance figures showed a A$3.018 billion deficit in May, reversing April’s A$1.383 billion surplus. In addition,  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 (from 2.5%), with both prints coming in short of expectations.

Meanwhile, the labour market remains healthy. Indeed, the Unemployment Rate ticked lower to 4.4% in May (from 4.5%), and the Employment Change increased by 40.6K individuals (from the revised 40.7K drop seen in the previous month).

Regarding inflation, June data came in short of what many were expecting, triggering speculation that the RBA might keep its hand steady for now and therefore giving bears a reason to return to the market and punish the Aussie. So far, the pace of disinflation remains weak, although the direction is still 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 around mid-2028, keeping the focus firmly on patience rather than any imminent pivot.

Looking ahead, investors expect the central bank to maintain its current stance at its August meeting, while they now anticipate just over 13 basis points of tightening by year-end.

China steadies without accelerating

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

Let’s see some numbers: the economy expanded by 4.3% YoY in the April-June period, while Retail Sales gained 1% in the year to June. In addition, Industrial Production kept its strong pace and expanded by 5.3% over the last twelve months.

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, and both imports and exports expanding markedly.

In the same line, business activity seems to be regaining traction after the National Bureau of Statistics (NBS) reported the Manufacturing PMI at 50.3 in May (from 50) and Services at 50.2 (from 50.1). In addition, private gauges like RatingDog remained in expansionary territory in June, as Manufacturing came in at 51.7 and Services at 54.1.

The disinflationary trend in China seems to have re-emerged after the CPI disappointed expectations and rose by 1.0% in the year to June (from 1.1%). On a monthly basis, prices dropped by 0.1%, while Producer Prices gained 4.1% over the last twelve months, exceeding the 3.9% annual gain recorded in the previous month.

Regarding monetary policy, the People’s Bank of China (PBoC) matched consensus on Monday, leaving its Loan Prime Rates (LPR) unchanged at 3.00% for the one-year tenor and 3.50% for the five-year tenor.

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

Sticky inflation keeps the RBA cautious

As widely expected, the Reserve Bank of Australia (RBA) left its Official Cash Rate unchanged at 4.35% in June.

While the accompanying statement retained a hawkish tone, policymakers appeared a little more comfortable with the progress made on inflation. The Board repeated that price pressures remain too high, and further tightening could still be required if inflation proves more persistent, while higher energy costs and geopolitical tensions are pointed to as key upside risks.

Governor Michele Bullock struck a more balanced tone in her press conference. Although she refused to rule out another rate increase, she noted that incoming data had broadly evolved as expected, the economy is not heading into recession, and the labour market remains relatively resilient. In other words, there was no urgency to tighten policy again.

The Minutes echoed that message. Policymakers agreed that leaving rates unchanged while maintaining a restrictive policy stance offered the best balance between bringing inflation back to target and preserving the gains in the labour market. The door to another hike remains open, but for now the RBA appears willing to give previous rate increases more time to work through the economy.

What lies ahead for AUD/USD?

Base case

While above its key 200-day SMA, around 0.6900, 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 picks up serious pace, spot should first leave behind the psychological 0.7000 barrier with solid conviction to face the next hurdle at the 0.7200 yardstick, all before reaching the 2026 peak near 0.7280. Up from here comes the minor 0.7300 barrier. Further up, the 2022 ceiling at 0.7593 is still in place. 

Bear case

In the current volatile context, we should not rule out the loss of further momentum. If sentiment deteriorates, the Greenback gains extra momentum, or Chinese data continue to disappoint, spot could recede further and initially challenge its critical 200-day SMA around 0.6900. The loss of this zone could lead to a renewed wave of bearish moves in the short term.

Bearish positioning extends as short exposure builds

Speculative sentiment towards the Australian Dollar weakened further in the week ending July 21, with net shorts widening to 37.7K contracts from 30.7K previously. Net positioning fell by another 7.0K contracts on the week, slightly more than the previous week's decline, extending a persistent deterioration in sentiment towards the Aussie.

Importantly, open interest increased sharply to 225.2K contracts from 208.5K. With net shorts deepening alongside rising participation, the latest figures increasingly point to fresh bearish positions being established rather than simply an unwind of previous longs. Speculative Exposure also fell to -16.7% from -14.7%, reinforcing the view that bearish conviction continues to build.

The longer-term momentum is less dramatic, however. The four-week change improved slightly to -24.7K contracts from -26.6K, suggesting the pace of the broader bearish adjustment remains on the soft side. The Net Position Percentile has dropped to 70.4, while the Speculative Exposure Percentile remains elevated at 79.6, suggesting that bearish exposure is material but still far from a historical extreme.

Overall, the Commodity Futures Trading Commission (CFTC) picture has clearly shifted from the long-liquidation story seen several weeks ago to a more established bearish positioning regime. Rising open interest, along with deeper net shorts, is the key development, signalling greater conviction behind the move. Still, with 4-week momentum gradually stabilising, the data suggest that bearish sentiment is deepening rather than accelerating sharply.

What comes next?

In the near term, the US Dollar, global risk sentiment, and geopolitics remain the main focus. Those remain the key drivers of price action. In the meantime, the next relevant event in Oz will be the release of housing market data and quarterly Export/Import prices.

Key risks include a sharper slowdown in China, a persistently cautious Fed, a change in investors' risk sentiment, or any shift in the RBA’s stance. Any of these could quickly destabilise the Australian currency in the near term.

Technical levels

In the daily chart, AUD/USD trades at 0.6932, holding just above the 200-day simple moving average (SMA) at 0.6906 but still well below the 55-day and 100-day SMAs at 0.7027 and 0.7053, respectively, which keeps the broader tone bearish. The Relative Strength Index (14) around 41 suggests only modest downside momentum, while the Average Directional Index (14) near 18 hints at a weakening trend, yet the pair remains capped by the overhead moving averages.

On the downside, immediate support is seen at the 200-day SMA at 0.6906, followed by the horizontal level at 0.6833, with deeper floors at 0.6660 and 0.6593 if selling pressure resumes. On the topside, initial resistance aligns with the 55-day SMA at 0.7027 and the 100-day SMA at 0.7053, ahead of the horizontal barrier at 0.7079, while higher up, 0.7278/0.7283 and 0.7661 mark more distant caps.

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

The broader picture remains constructive

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, that support is being offset by a resilient US Dollar, lingering geopolitical tensions 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 0.7000 will likely require a sustainable road downwards of US inflation, a more dovish turn from the Fed, or a meaningful improvement in global risk appetite.

Until then, expect the AUD to be more driven by outside forces than domestic fundamentals.