The Australian Dollar rose against most major currencies on Wednesday and was near flat versus the US Dollar at about 0.7240 in European trade. It moved higher as markets increased bets on a Reserve Bank of Australia rate rise after the 2026 budget announcement on Tuesday.
Markets still price about a 20% chance of a June move to a 4.35% cash rate, Reuters reported. The chance of an August increase to 4.60% moved further above 80%.
The 2026 budget lowers the tax rate for incomes between $18,201 and $45,000 to 15% from July 2026. This change is expected to lift household spending and raise inflation expectations.
A meeting between US President Donald Trump and Chinese leader Xi Jinping is due during Trump’s Beijing trip on May 13-15. The outcome may affect the Australian Dollar due to Australia’s export links with China.
The US Dollar also stayed firm on expectations of at least one Federal Reserve rate rise this year. The US Dollar Index was up 0.3% at about 98.58, its highest level this month.
Given the new budget, we are seeing strong signals that the Reserve Bank of Australia is preparing to raise interest rates. With the latest quarterly CPI print coming in at a stubborn 3.8%, the tax cuts are likely to fuel inflation further, almost forcing the RBA’s hand. This is why the market is now pricing in an over 80% chance of a rate hike to 4.60% in August.
This backdrop suggests we should be looking at bullish positions on the Australian dollar for the medium term. Derivative traders could consider buying AUD/USD call options with expiry dates beyond the August RBA meeting to capitalize on this expected rate move. The current price around 0.7240 offers a solid entry point before the market fully prices in the hike.
However, the major immediate risk is the ongoing meeting between President Trump and Xi Jinping in Beijing. Australia’s economic health is closely tied to China, with commodity exports being a key driver. We saw how sensitive the currency was when iron ore prices fluctuated around the $120 per tonne mark throughout 2025.
Because of this meeting, implied volatility on AUD currency pairs is currently elevated, making option premiums expensive. An alternative strategy for the coming days could be to sell short-dated AUD/USD strangles, which would profit if the meeting concludes without any major market-moving surprises. This is a play on volatility decreasing after the event passes this Friday.
We must also respect the strength of the US dollar, which is firming up on expectations that the Federal Reserve will also hike rates. The US Dollar Index hitting 98.58 shows that this isn’t just an AUD story, which is why the AUD/USD pair has flattened. Therefore, another approach is to go long the AUD against a weaker currency, such as the Japanese Yen, to better isolate the RBA’s hawkish policy.
