The Australian Dollar (AUD) keeps the ongoing move higher in place midweek, with AUD/USD revisiting the 0.7240 region for the first time since mid-May. Furthermore, the 0.7200 region appears to have emerged as a solid contention for occasional bouts of weakness.
The pair has rapidly left behind Tuesday’s slight retracement, gathering fresh traction amid the US Dollar’s vacillating price action in a context of unabated tensions in the Middle East and increasing caution ahead of the release of US inflation figures toward the end of the week.
Meanwhile, AUD/USD has trended higher since early July, supported by the Reserve Bank of Australia’s (RBA) hawkish policy bias and domestic inflation that remains above the bank’s target.
Australia’s data point to slower but resilient growth
Australia’s economy continues to compare favourably with many of its G10 peers, supported by domestic demand and positive economic growth. Persistent inflation also supports the RBA’s cautious, data-dependent policy stance.
Business activity remained in expansionary territory in August after final Purchasing Managers’ Index (PMI) readings showed the Manufacturing index unchanged at 52.0, while the Services index edged a tad down to 53.2.
Trade data provided another positive signal: Australia recorded an A$1.923 billion surplus in July, adding to the A$2.341 billion surplus registered in June.
Growth figures were less encouraging, however. Indeed, the Gross Domestic Product (GDP) expanded by 0.4% QoQ in the second quarter of 2026, up from 0.3%, while annual growth came in at 2.1%, down from the previous 2.5% yearly expansion.
The labour market also showed signs of losing momentum in July. The Unemployment Rate rose to 4.5%, while Employment Change declined by 15.8K following a revised increase of 80.3K in the previous month.
Inflation remains the main constraint after July data showed price pressures running well above the RBA’s 2%-3% target band, suggesting that the return to target could remain uneven and prolonged. That said, the headline inflation eased to 3.5% in July (from 3.8%), while underlying price pressures tracked by the Trimmed Mean held steady at 3.6%.
The Melbourne Institute’s Consumer Inflation Expectations measure reinforced that view, rising to 4.9% in August from 4.7%.
The figures leave the RBA’s inflation task incomplete. Policymakers expect inflation to return to target only in early 2028, keeping the emphasis on patience rather than an imminent policy pivot.
China stabilises but fails to add momentum
China is providing stability for the Australian economy, but not the growth impulse that has supported the Australian Dollar during previous expansions.
The Chinese economy grew by 4.3% YoY in the April-June period, while Retail Sales rose by only 0.6% in the year to July, and the Industrial Production growth slowed to 4.5% over the last twelve months.
Trade figures were stronger. China’s surplus widened to $119.1 billion in July from $112.5 billion in June, supported by decent increases in both imports and exports.
Business surveys presented a mixed picture: the National Bureau of Statistics reported that the Manufacturing PMI improved to 49.8 in August from 49.2, while the Services PMI remained unchanged at 49.0. On the other hand, private measures like RatingDog remain in expansionary territory, with Manufacturing at 51.5 (from 50.9) and Services at 51.4 (from 50.4).
Disinflationary pressures seem to have taken a breather in August after the CPI gained 0.8% YoY in August from 0.5%, while prices rose by 0.4% on a monthly basis. Producer Prices rose by 3.8% over the previous twelve months, down from the 3.5% increase recorded in the previous month.
The People’s Bank of China (PBoC) left its Loan Prime Rates unchanged at its latest event, maintaining the one-year rate at 3.00% and the five-year rate at 3.50%.
China is therefore neither providing a major boost nor creating a significant drag. Unless the data reveal a clearer acceleration or deterioration, its influence on AUD/USD is likely to remain limited.
RBA retains a tightening bias
The RBA left its Official Cash Rate (OCR) unchanged on August 11 and retained a clear tightening bias, citing above-target inflation and upside risks to the outlook. The decision to hold rates was unanimous.
The Minutes maintained that cautious but hawkish stance. Several officials warned that inflation risks could materialise and leave the Board prepared to raise rates. Potential sources of pressure include increased investment in data centres, cost pass-through and higher energy prices.
Policymakers discussed a 25-basis-point increase but concluded that the current policy setting was sufficiently restrictive. They also acknowledged more balanced risks, including falling house prices and the possibility that inflation could decline without causing significant damage to employment.
Fresh GDP, labour-market and inflation figures were expected before the September meeting, leaving policy dependent on the incoming data.
Markets are pricing in nearly 5 basis points of tightening by year-end and expect the RBA to hike the OCR by 25 basis points at its September 29 meeting.
AUD/USD outlook hinges on 0.7200
Base case
The medium-term outlook remains tilted towards further gains, as long as AUD/USD stays above its 200-day Simple Moving Average (SMA), which is currently near 0.7000.
Further progress will still require a catalyst. Without a sustained improvement in risk appetite or continued US Dollar weakness, upward momentum could begin to fade.
Bull case
A stronger risk-on environment and a convincing break above 0.7200 would bring the 2026 high near 0.7280 into view.
Beyond that level, resistance emerges at the 0.7300 round level, followed by the 2022 ceiling at 0.7593.
Bear case
A deterioration in global risk sentiment, renewed strength in the Green back or further weakness in Chinese data could spark fresh selling interest in spot.
Initial support is located at the September floor at 0.7121 (September 2), seconded by the provisional 100-day and 55-day SMAs near 0.7080 and 0.7040, respectively. The more important level remains the 200-day SMA around 0.7000.
A break below that area would weaken the broader constructive structure and increase the risk of a deeper short-term decline.
AUD shorts remain elevated, but conviction fades
AUD bearish positioning eased in the week ending September 1, as per the latest report from the Commodity Futures Trading Commission (CFTC). Indeed, net speculative positioning improved by more than 5K contracts to around 39.4K, reversing the previous week’s marginal deterioration. In the same line, the 4-week change improved to -6,216 from -4,491, indicating that the broader negative positioning has been losing further ground.
Additionally, open interest increased sharply by almost 57.8K contracts to around 391.7K. This combination of a sizeable rise in participation and a reduction in net shorts suggests that the move was driven by a mix of short covering and fresh long exposure, rather than a broad withdrawal from the Australian currency.
Furthermore, speculative exposure improved to -10.1% from -13.3%, although its percentile remained elevated at 81.6. This indicates that bearish AUD exposure is still historically significant. The net-position percentile rose to 68.1, but it remains below levels associated with extreme positioning.
Overall, the AUD’s bearish bias moderated meaningfully, with stronger participation lending some credibility to the improvement. Nevertheless, the still elevated exposure percentile suggests that the current situation is, for now, an easing of bearish conviction rather than a confirmed bullish reversal.
What’s next for the Aussie
US Dollar dynamics, global risk sentiment and geopolitical developments remain the main near-term drivers of AUD/USD.
Meanwhile, market participants will be watching the Melbourne Institute’s release of its Consumer Inflation Expectations on Thursday.
Beyond the immediate releases, the main risks include a sharper slowdown in China, a persistently cautious Federal Reserve, a deterioration in investor risk appetite or a change in the RBA’s current policy stance. Any of these developments could quickly alter the outlook for the Australian Dollar.
Technical analysis
In the daily chart, AUD/USD trades around 0.7221, maintaining a constructive bullish tone as spot holds above the 55-day, 100-day and 200-day simple moving averages between 0.7043 and 0.7080. The cluster of underlying demand just below price is reinforced by a firm Relative Strength Index (14) near 68, flirting with overbought territory, while the Average Directional Index (14) around 25 hints at a strengthening but not yet aggressive trend.
On the topside, initial resistance is seen at 0.7278, followed closely by 0.7283, with a more distant barrier at 0.7661. On the downside, immediate support emerges at 0.7079, backed by the nearby 100-day SMA at 0.7080 and the 55-day SMA at 0.7043, ahead of deeper levels at 0.6996, 0.6833 and the broader structural floors clustered around 0.6660, 0.6593 and 0.6414.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
External risks make further gains harder to sustain
The broader picture continues to favour the AUD.
Australia’s domestic backdrop compares favourably with that of many advanced economies, while the RBA is in no hurry to abandon its hawkish bias.
The recovery nevertheless remains vulnerable to renewed US Dollar strength, persistent geopolitical uncertainty and a Chinese economy that is stabilising rather than accelerating.
The 200-day SMA remains the key level for the medium-term outlook. Holding above it preserves the constructive structure, but a convincing break above 0.7200 will probably require a more convincing sell-off of the Greenback, stronger demand for risk-sensitive assets, additional cooling in US inflation or a (less-likely) dovish shift from the Fed.
Until then, external forces are likely to exert more influence over the Australian Dollar than domestic fundamentals.
US-China Trade War FAQs
Generally speaking, a trade war is an economic conflict between two or more countries due to extreme protectionism on one end. It implies the creation of trade barriers, such as tariffs, which result in counter-barriers, escalating import costs, and hence the cost of living.
An economic conflict between the United States (US) and China began early in 2018, when President Donald Trump set trade barriers on China, claiming unfair commercial practices and intellectual property theft from the Asian giant. China took retaliatory action, imposing tariffs on multiple US goods, such as automobiles and soybeans. Tensions escalated until the two countries signed the US-China Phase One trade deal in January 2020. The agreement required structural reforms and other changes to China’s economic and trade regime and pretended to restore stability and trust between the two nations. However, the Coronavirus pandemic took the focus out of the conflict. Yet, it is worth mentioning that President Joe Biden, who took office after Trump, kept tariffs in place and even added some additional levies.
The return of Donald Trump to the White House as the 47th US President has sparked a fresh wave of tensions between the two countries. During the 2024 election campaign, Trump pledged to impose 60% tariffs on China once he returned to office, which he did on January 20, 2025. With Trump back, the US-China trade war is meant to resume where it was left, with tit-for-tat policies affecting the global economic landscape amid disruptions in global supply chains, resulting in a reduction in spending, particularly investment, and directly feeding into the Consumer Price Index inflation.
