The Australian dollar firmed against the US dollar on Tuesday after the Reserve Bank of Australia kept policy steady while retaining tightening bias. AUD/USD was around 0.7070 after recovering from an intraday low of 0.7042. The RBA held the cash rate at 4.35%, following three consecutive rate rises earlier in the year, and said uncertainty over domestic activity and inflation remains elevated, adding it would raise the cash rate further if needed to meet its inflation target.
Markets also weighed mixed signals from China, Australia’s largest export market, where May Industrial Production rose 4.5% year on year versus expectations of 4.3%, while Retail Sales fell 0.6% against forecasts for no change. Upside in AUD/USD was capped as the US dollar stayed broadly steady ahead of Wednesday’s Federal Reserve decision, with the Fed expected to keep rates in the 3.50%–3.75% range for a fourth straight meeting. Elsewhere, oil prices have eased after a US–Iran framework agreement, while US CPI rose to 4.2% in May, the highest since April 2023; FXStreet data show six of 11 voting FOMC members are hawkish, excluding Fed Chair Kevin Warsh.
RBA Policy Stance and the Australian Dollar’s Support
The Reserve Bank of Australia’s decision to hold its cash rate at 4.10% gives us a reason to believe the Australian Dollar may find some support. Despite the pause, their hawkish tone signals a readiness to hike again if inflation doesn’t cool, keeping the floor under the currency for now. We see the AUD/USD pair reacting to this, currently trading around 0.6650 after the announcement.
However, recent mixed data from China is muddying the waters for the Aussie dollar, which often trades as a proxy for their economy. While China’s industrial production for May came in stronger than expected at 5.9%, retail sales missed the mark, growing by only 2.8%. This conflicting data suggests an uneven recovery, capping any major rally in the AUD.
US Federal Reserve’s Impact and Trading Strategies
The US Dollar remains the dominant force, supported by the Federal Reserve’s stance to keep interest rates higher for longer. The Fed funds rate is holding firm in the 5.25%-5.50% range, as the latest US inflation data showed the Consumer Price Index at 3.1%, still stubbornly above the Fed’s 2% target. This rate differential between the US and Australia continues to put downward pressure on the AUD/USD pair.
For derivative traders, this tug-of-war between a hawkish RBA and an even more hawkish Fed suggests range-bound price action is likely in the short term. We believe selling volatility through strategies like iron condors could be profitable, targeting a range between roughly 0.6550 and 0.6750. The elevated uncertainty provides attractive premiums for option sellers.
Given the persistent strength of the US dollar, we are also considering downside protection for any long positions. Buying out-of-the-money AUD/USD put options with expirations in the next several weeks offers a cheap way to hedge against a potential break below key support. Historically, when the Fed remains this committed to fighting inflation, as we saw in 2023, riskier currencies tend to underperform.
