AUD/USD Holds Above 0.70 Despite Softer Australian Inflation

AUD/USD was trading around 0.7033 on 3 August, up approximately 0.2% during the Asian session and holding above the psychologically important 0.70 level.

That performance is more resilient than the latest Australian data might suggest.

Australia’s June-quarter inflation report came in below expectations, causing markets to almost eliminate the possibility of another Reserve Bank of Australia rate increase at its August meeting. China’s manufacturing sector, an important external influence on Australian assets, also expanded at its slowest pace in four months during July.

Normally, that combination would place clear pressure on the Australian dollar.

Instead, AUD/USD has remained above 0.70.

The reason is that the market has removed the expectation of an immediate RBA increase without concluding that Australia is about to begin an easing cycle. At the same time, broad pressure on the US dollar and a still-favourable Australian interest-rate position have provided support from the other side of the pair.

The current AUD/USD price is therefore not saying that Australian fundamentals have suddenly strengthened.

It is saying that the deterioration has not yet been large enough to justify abandoning the Australian dollar while the US dollar is facing problems of its own.

The inflation report removed an August hike, not Australia’s entire rate advantage

The June-quarter CPI report changed the immediate RBA outlook.

Australia’s CPI rose 0.6% during the quarter, while the trimmed-mean measure of underlying inflation increased 0.8%. Annual trimmed-mean inflation stood at 3.6%, still above the RBA’s 2%–3% target range but below both market expectations and the central bank’s earlier forecast.

Financial markets reacted quickly.

The probability of an RBA rate increase at the August meeting fell to approximately 3%, according to Reuters. UBS and Westpac withdrew their forecasts for an August increase, although UBS continued to expect a possible move later in the year.

That repricing should have weakened AUD/USD more sharply.

It did not, because the market was changing the timing of the next RBA move rather than pricing a complete reversal in Australian monetary policy.

The RBA cash rate is currently 4.35%. The Federal Reserve’s target range is 3.50%–3.75% after its 29 July decision to leave policy unchanged. Australian short-term rates therefore remain higher than their US equivalents even after expectations for an August increase faded.

The difference is not large enough to guarantee continuous Australian-dollar appreciation.

It is large enough to prevent softer inflation from automatically creating a bearish AUD/USD rate story.

Softer inflation does not mean Australian inflation is low

The CPI report was softer than expected, but it did not show that inflation had returned comfortably to target.

The ABS reported that annual all-groups inflation slowed to 3.8% in June from 4.0% in May. Trimmed-mean inflation remained at 3.6%. Housing costs increased 6.8% over the year, electricity prices rose 22.4%, new-dwelling prices increased 5.8%, and rents were 3.6% higher.

Those details matter because the market is deciding whether the RBA has finished raising rates or merely gained more time.

Lower fuel prices helped reduce the quarterly headline figure. However, housing and domestic service costs remained persistent.

Services inflation was around 4%, according to the Reuters analysis of the report.

This is not the inflation profile of an economy preparing for rapid rate cuts.

It is the inflation profile of a central bank that can pause, observe the impact of three increases already delivered in 2026 and wait for evidence before acting again.

That difference is supportive for the Australian dollar.

A rate-cut cycle would reduce the return available from Australian assets.

A prolonged hold at 4.35% preserves much of that return, even when another increase is no longer imminent.

The labour market makes a dovish RBA pivot difficult

Australia’s labour market provides the strongest argument against interpreting the softer CPI result as the beginning of monetary easing.

Employment increased by 76,000 in June, substantially stronger than expected, while the unemployment rate remained at 4.4%. The rise included approximately 47,000 additional part-time workers.

There were some weaker details.

The underemployment rate increased to 6.5%, and the broader underutilisation rate rose to 10.9%.

Even so, the headline employment gain showed that labour demand had not collapsed under the weight of higher borrowing costs.

This creates an important policy constraint.

The RBA can afford to wait because inflation came in below forecast.

It cannot easily promise lower rates while employment is still expanding strongly and underlying inflation remains above target.

For AUD/USD, the labour market acts as a floor under rate expectations.

It does not guarantee another RBA increase, but it makes a rapid shift from “possible further tightening” to “coming rate cuts” much less credible.

The market is distinguishing between a pause and the end of the cycle

RBA Governor Michele Bullock said on 28 July that the central bank was still uncertain whether the increases already delivered would be sufficient to return inflation to target.

She said the Board remained prepared to raise the cash rate above its current 4.35% level if inflation became more persistent. Before the CPI report, markets had expected one additional increase during 2026.

The softer inflation data weakened that expectation.

It did not invalidate Bullock’s broader warning.

The RBA’s next Monetary Policy Board meeting will take place on 10–11 August. The decision and updated Statement on Monetary Policy are scheduled for 11 August.

The likely outcome is now a hold.

The more important question is whether the RBA describes that hold as:

a temporary pause while inflation remains too high,

or evidence that 4.35% is probably the peak.

AUD/USD can tolerate the first message relatively well.

The second would be more difficult because it would encourage markets to begin discussing when Australian rates could eventually fall.

Broad US dollar weakness has protected AUD/USD

The Australian side of the pair only explains part of the resilience.

The other part comes from the dollar.

The United States and Japan jointly intervened in the currency market to support the yen after USD/JPY had reached historically extreme levels. The operation triggered a large unwinding of short-yen and long-dollar positions, placing pressure on the US currency more broadly.

On 3 August, the yen strengthened to around 155.20 per dollar, its highest level in roughly three months. The euro and sterling also advanced as the dollar came under pressure.

AUD/USD benefited from the same adjustment.

This does not mean US-Japan intervention directly improves Australia’s economy.

It means a large position that had supported the dollar across currency markets is being reduced.

When investors unwind long-dollar exposure, the Australian dollar can rise even if Australian domestic data are only moderately supportive.

That is why the move above 0.70 should not be attributed entirely to confidence in the RBA.

Part of it reflects weakness in the currency on the other side of the exchange rate.

The Fed still prevents a clean Australian-dollar breakout

Although the dollar has weakened, the Federal Reserve has not delivered a clearly dovish policy shift.

The FOMC left its target range at 3.50%–3.75% on 29 July, but the decision passed by a 9–3 vote. Three officials preferred an immediate 25-basis-point increase.

That division keeps additional US tightening in the discussion.

The Australian rate advantage therefore exists, but it is not guaranteed to widen.

The RBA is likely to hold in August after softer inflation.

The Fed is also holding, but a meaningful group of policymakers believes US rates should be higher.

The next important test comes from US labour-market data.

A strong employment report would reinforce the hawkish members’ argument and could restore demand for the dollar.

A weak report would make the Fed’s July hold look more appropriate and allow AUD/USD to retain more of its current support.

This week’s Australian-dollar performance therefore depends partly on data that have nothing to do with Australia.

China is the main weakness in the AUD/USD argument

The largest domestic-external contradiction for the Australian dollar comes from China.

The RatingDog China General Manufacturing PMI, compiled by S&P Global, fell to 50.9 in July from 51.7 in June. The result was below the 51.5 consensus forecast and represented the slowest expansion in four months. New-order growth fell to its weakest rate since January.

China’s official manufacturing survey was weaker, moving unexpectedly into contraction during July. Second-quarter economic growth slowed to 4.3%, its weakest pace in more than three years and below the lower end of the government’s 4.5%–5.0% full-year target.

These figures are relevant because Australia has extensive trade exposure to Chinese industrial demand.

A weaker Chinese manufacturing cycle can reduce expectations for Australian commodity exports, company earnings and national income.

The private PMI report was not entirely negative.

Export orders returned to modest growth, manufacturers added workers at the fastest pace since August 2023 and firms remained optimistic about production over the following year.

But the broad direction was still slower.

The AUD/USD rally is therefore occurring despite a less supportive Chinese growth signal.

That makes the quality of the move less convincing than it would be if both Australian and Chinese data were improving together.

Beijing’s response matters more than one PMI number

Weak Chinese data do not always weaken the Australian dollar immediately.

The currency reaction depends partly on what investors expect Beijing to do about the slowdown.

Chinese leaders pledged at the end of July to accelerate fiscal spending on infrastructure projects already included in the budget. However, they did not announce a large new stimulus programme.

That distinction matters for AUD.

Faster implementation of existing spending can support construction and industrial activity.

But it may not create the same commodity-demand response as a new, large-scale infrastructure package.

The market is therefore left with limited policy support rather than a decisive stimulus shock.

For AUD/USD to move substantially above the current area, traders may need clearer evidence that China’s slowdown is stabilising or that fiscal measures are becoming large enough to improve demand for Australian exports.

Without that confirmation, China remains a ceiling on the Australian-dollar story.

Falling oil prices help Australia’s inflation outlook but change the rate calculation

Oil prices declined sharply on 3 August as the United States delayed further military action against Iran and hopes for a diplomatic agreement increased.

For Australia, lower fuel prices have two effects.

They reduce direct pressure on household transport costs and lower the risk that the global energy shock will spread further through business expenses.

That makes the RBA’s inflation problem easier to manage.

However, the same improvement also reduces the urgency for another rate increase.

The immediate currency impact is therefore mixed.

Lower oil can support household spending and global risk appetite.

At the same time, it removes part of the argument for higher Australian interest rates.

This is another reason AUD/USD is holding rather than producing a powerful one-directional move.

The inflation outlook is improving, but some of the improvement reduces the rate support that previously attracted buyers to AUD.

The 0.70 level is testing the quality of Australian-dollar demand

AUD/USD above 0.70 is important less because of the round number itself and more because of what has happened around it.

The pair is holding above the level after:

Australian inflation undershot expectations,

the probability of an August RBA increase fell close to zero,

and Chinese manufacturing momentum weakened.

That tells us current buyers are not relying on an immediate Australian rate increase.

They are relying on the existing rate level, the strong labour market and a weaker US dollar.

The next question is whether those sources of demand are durable.

A sustained move above 0.7050

A break that holds above approximately 0.7050 would suggest the broad dollar decline is developing into something more persistent.

The signal would be stronger if US yields also fall and markets reduce expectations of further Fed tightening.

For the move to extend much further, China data would probably need to stop deteriorating.

Continued trading around 0.6980–0.7050

This would be consistent with the current fundamental balance.

The RBA is not expected to hike in August, but Australian rates remain high.

The Fed is divided, China is slowing and broad dollar positioning is being reduced.

None of those forces is strong enough on its own to create a clear trend.

A fall below 0.6950

A sustained decline below this region would suggest the support from dollar weakness is fading.

It could occur if US employment data strengthen the case for another Fed increase or if weaker Chinese indicators place greater pressure on commodity-linked currencies.

Such a move would also indicate that the market is beginning to treat Australia’s softer CPI as evidence that the RBA tightening cycle has reached its peak.

What would turn the current resilience into a stronger AUD trend?

AUD/USD needs more than the absence of bad news.

A more durable upward move would require confirmation from three areas.

First, US data would need to weaken enough to reduce expectations of further Federal Reserve tightening.

Second, the RBA would need to retain a credible higher-for-longer message at its 11 August decision, even while keeping the cash rate unchanged.

Third, China would need to show either stronger economic activity or a more forceful policy response.

The Australian dollar currently has only part of that combination.

The US dollar is under pressure.

Australian rates remain comparatively high.

But China is slowing, and the softer CPI report has reduced the probability of another near-term RBA increase.

That is sufficient to defend 0.70.

It may not yet be sufficient to produce a sustained move much higher.

AUD/USD assessment

AUD/USD holding above 0.70 after the June-quarter CPI report is a meaningful sign of resilience.

Australian inflation came in below expectations, and markets reduced the probability of an August RBA increase to almost zero. China’s July manufacturing indicators also weakened. Under normal circumstances, those developments would create a stronger Australian-dollar decline.

The pair has remained supported because the market is not pricing immediate Australian easing.

The RBA cash rate remains at 4.35%, above the Federal Reserve’s 3.50%–3.75% range. Australian employment increased by 76,000 in June, leaving the central bank with little reason to discuss rate cuts while underlying inflation is still 3.6%.

Broad US dollar weakness has supplied additional support following coordinated intervention in the yen market.

That external support is important, but it also creates a risk.

If the dollar stabilises after the intervention-driven position adjustment, AUD/USD will once again have to rely more heavily on Australian and Chinese fundamentals.

The current price is therefore best interpreted as a resilient hold above 0.70, rather than proof of a new Australian-dollar uptrend.

The market has concluded that softer inflation gives the RBA permission to wait.

It has not yet concluded that Australian interest rates are about to fall.

As long as that distinction remains intact, AUD/USD can continue defending the 0.70 area even without an August rate increase.