AUD/USD traded near 0.7020 on Wednesday, extending the Australian Dollar’s decline to a fourth session after a US inflation print that broadly matched expectations and kept the focus on the Federal Reserve maintaining higher rates for longer. May CPI rose 0.5% month on month, easing from 0.6%, while headline inflation accelerated to 4.2% year on year from 3.8%. Core CPI increased 0.2% month on month versus a 0.3% forecast and 0.4% previously, and annual core CPI ticked up to 2.9% from 2.8%; the US Dollar did not gain traction after the release. Separately, National Australia Bank reiterated that the Reserve Bank of Australia’s next move is likely a cut, with no further hike expected and the cash rate seen as the peak, adding pressure to the AUD.
On the four-hour chart, the pair was at 0.7019, remaining below the 20-period SMA at 0.7045 and the 100-period SMA at 0.7127, with the RSI around 35. Resistance levels were cited at 0.7027 and 0.7038 before the 20-period SMA, while support sat at 0.7018 and then 0.6998.
Policy Divergence and Outlook
The widening policy gap between the Reserve Bank of Australia (RBA) and the US Federal Reserve is creating a clear bearish outlook for the AUD/USD. We see the pair continuing its slide as the interest rate differential favors holding the US dollar. This divergence is the central theme for our trading strategy in the coming weeks.
The forecast for future RBA rate cuts is weighing heavily on the Aussie dollar. With Australia’s latest quarterly inflation data from Q1 2026 showing a drop to 3.6%, the central bank has a reason to consider easing policy later this year. We believe the current RBA cash rate of 3.85% represents the peak for this cycle.
In contrast, persistent US inflation, with the May headline CPI at 4.2%, suggests the Federal Reserve will hold its rate in the 5.25-5.50% range for longer. This “higher for longer” stance makes holding US dollars more attractive than holding Australian dollars. The Fed needs to see several more months of cooling data before considering any policy change.
Historical Precedent, Technicals, and Trading Strategy
We have seen this playbook before, especially during the 2014-2015 period when similar policy divergence led to a sustained, multi-month decline in the AUD/USD. That historical precedent strengthens our conviction in a continued downtrend. This is a familiar pattern that presents a clear opportunity.
The technical picture supports this view, with the pair trading below the 0.7045 moving average, which now acts as firm resistance. We should consider buying put options with strike prices below the 0.7000 level to position for a further downward move. Selling out-of-the-money call options with strikes above 0.7125 is also a viable strategy to collect premium, as rallies are likely to be sold into.
Our immediate focus is on the 0.6998 support level, which is a key psychological floor. A decisive break below this area would likely accelerate selling pressure and open the door to a deeper decline. We will use any short-term rallies toward the 0.7045 resistance area as opportunities to add to our short positions.
