AUD/USD Forecast and News

AUD/USD remains firmly within its broader upward trend, brushing off two consecutive daily declines as markets continue to digest the Reserve Bank of Australia (RBA)’s hawkish rate decision earlier in the day.

After a brief wobble, the Australian Dollar (AUD) found its footing again on Tuesday, pushing AUD/USD back above the 0.7000 mark. However, that area is proving sticky for now, with early resistance showing up around 0.7050.

Beyond the RBA, the pair is also drawing support from an indecisive US Dollar (USD), as Investors are still trying to make sense of the so-called “Warsh trade”, leaving the Greenback without a clear directional impulse and giving the Aussie Dollar some breathing room.

Australia: cooling, but still on its feet

Recent Australian data have been far from exciting, but they do reinforce a familiar theme: the economy is slowing gently, not stalling. Momentum has eased, yet the soft-landing story remains intact.

January Purchasing Managers’ Index (PMI) surveys support that view. Both Manufacturing and Services improved and stayed comfortably in expansion territory, printing at 52.4 and 56.0, respectively. Retail Sales are still holding up reasonably well, and although the trade surplus narrowed to A$2.936 billion in November, it remains solidly positive.

Growth is moderating, but only gradually. Gross Domestic Product (GDP) expanded by 0.4% QoQ in Q3, down from 0.7% previously. On an annual basis, growth held steady at 2.1%, exactly in line with RBA projections.

The labour market continues to stand out: Employment jumped by 65.2K in December, while the Unemployment Rate unexpectedly edged down to 4.1% from 4.3%.

Inflation, however, remains the awkward part of the story. December’s Consumer Price Index (CPI) surprised to the upside, with headline inflation rising to 3.8% YoY from 3.4%. The trimmed mean measure increased to 3.3%, matching consensus but edging above the RBA’s own 3.2% forecast. On a quarterly basis, trimmed mean inflation climbed to 3.4% over the last twelve months in Q4, the highest since Q3 2024. That mix keeps the case for a 25 basis points hike at the February 3 meeting firmly on the table.

China: steady support, no fireworks

China continues to offer a supportive backdrop for the AUD, though without the momentum needed to spark a sustained rally.

The economy grew at an annualised pace of 4.5% in the October–December quarter, with quarterly growth running at 1.2%. Retail Sales rose by an annualised 0.9% in December. Respectable numbers, but hardly eye-catching.

More recent data hint at a loss of momentum, unwinding part of the earlier acceleration. Both the National Bureau of Statistics (NBS) Manufacturing PMI and the Non-Manufacturing PMI slipped back into contraction in January, printing at 49.3 and 49.4, respectively.

By contrast, the Caixin Manufacturing index edged higher to 50.3, keeping it just in expansion. Attention now turns to the Caixin Services reading later in the week for confirmation on whether activity is stabilising or rolling over again.

Trade was one of the clearer bright spots. The surplus widened sharply to $114.1 billion in December, helped by a near-7% jump in exports alongside a solid 5.7% rise in imports.

Inflation remains mixed. Consumer prices were unchanged at 0.8% year-on-year in December, while producer prices stayed firmly negative at -1.9%, highlighting that deflationary pressures have not fully disappeared.

For now, the People’s Bank of China (PBoC) is sticking to a cautious approach. Loan Prime Rates (LPR) were left unchanged in January at 3.00% for the one-year and 3.50% for the five-year, reinforcing expectations that any policy support will be gradual rather than forceful.

RBA: hawkish signal, no rush to reverse

The RBA raised the cash rate to 3.85% in a clearly hawkish move, broadly in line with expectations. Forecast upgrades for both growth and inflation point to firmer momentum in activity and price pressures that are becoming more broad-based. Core inflation is now expected to remain above the 2–3% target for most of the forecast horizon, reinforcing the case for policy restraint.

The central message is that inflation is increasingly demand-driven. Stronger-than-expected private demand is cited as a reason for tighter policy, even as productivity growth remains weak. Governor Bullock described the move as an “adjustment” rather than the start of a new tightening cycle, but the underlying signal was clear: policymakers are uneasy with the upward drift in inflation.

For markets, the tension is straightforward: Rates look set to stay restrictive for longer, limiting the scope for near-term easing. From an FX perspective, that supports a firmer AUD at the margin, particularly against low-yielding currencies, even if the focus on full employment caps the likelihood of an aggressive hiking phase.

Following the RBA decision, markets are now pricing in around 46 basis points of tightening by year-end.

Positioning: some auspicious signs for bulls

Positioning data hint that the worst of the bearish mood around the AUD may be in the rearview mirror. Speculators have moved back to a net long position for the first time since early December 2024, with net longs edging up to just over 7.1K contracts in the week ended January 27, according to the Commodity Futures Trading Commission (CFTC).

Open interest has also picked up sharply, rising to multi-week highs above 252K contracts, suggesting traders are starting to re-engage. That said, this still feels like early positioning rather than a strong, high-conviction bet on a sustained AUD rally.

What to watch next

Near term: The focus shifts back to the US side of the equation. Indeed, upcoming data, tariff-related headlines, and the usual dose of geopolitical noise are likely to steer the USD. At home, the labour market and inflation prints, and what they mean for the RBA’s next move, remain the key swing factors for the AUD.

Risks: The AUD remains highly sensitive to shifts in global risk sentiment. Any sudden wobble in risk appetite, renewed concerns around China, or an unexpected rebound in the USD could quickly take the shine off recent gains.