Aussie dollar rebounds as deal optimism offsets rate pressures

AUD/USD finished lower last week at 0.7128 (-0.28%) after a softer‑than‑expected Australian jobs report took the steam out of expectations for multiple Reserve Bank of Australia (RBA) rate hikes before year end.

The Australian jobs data revealed a noticeable slowdown in hiring and a rise in the unemployment rate to 4.5% in April, easing fears of a more aggressive tightening path from the RBA into year end. At the same time, a string of robust United States (US) economic releases in recent weeks has lifted the chances that the Federal Reserve (Fed) will deliver at least one rate hike before the end of 2026, supporting the US dollar and weighing on the Australian dollar.

This combination has resulted in a sharp narrowing of the yield advantage the Australian dollar currently enjoys over the greenback. Reflecting this shift, the yield on the Australian 10‑year bond at 4.88% now holds just a 33 basis points (bp) premium over its US counterpart, down significantly from 63 bp just two weeks ago.

Over the weekend, fresh geopolitical developments provided a much‑needed boost for the Australian dollar. President Trump posted on social media that a ‘largely negotiated’ memorandum of understanding (MOU) had been reached to reopen the Strait of Hormuz.

While some of the initial enthusiasm has since been tempered by the Trump administration indicating there is no need to rush a final deal, risk assets, including the Australian dollar, have elected to give the reports the benefit of the doubt. The currency is currently trading higher near 0.7170 (+0.60%), even though many similar agreements over the past five or six weeks have failed to deliver a tangible outcome.

Looking ahead, the path for AUD/USD will be shaped by a mix of local data and ongoing offshore developments. On the domestic front, attention turns squarely to the Australian consumer price index (CPI) release (previewed below). Offshore, the focus remains firmly on Middle East headlines and the US core personal consumption expenditures (PCE) price index, which is the Fed’s preferred measure of inflation.

Inflation

Date: Wednesday, 27 May at 11.30am AEST

Last month’s CPI data delivered a notable jump, with headline inflation rising to 4.6% year‑on‑year (YoY) in the 12 months to March 2026 – the highest reading since September 2023. Housing, which is the highest weighted group in the CPI, was the largest contributor to annual inflation, with a rise of 6.5%. This was followed by an 8.9% rise in transport, where automotive fuel prices surged 32.8% from February to March – the largest monthly increase since the series began in 2017. Importantly for the RBA, its preferred measure – the trimmed mean – held steady at 3.3%, well above the bank’s 2% – 3% target midpoint.

The RBA responded just days later by lifting the cash rate 25 bp to 4.35%, its third consecutive 25 bp rate hike. In the statement, the board sounded hawkish, noting that developments in the Middle East were already adding to inflation and warning of potential second‑round effects.

In the accompanying press conference, Governor Bullock sounded more dovish and emphasised that the three rate hikes the RBA had delivered this year had given the board more ‘space’ to assess how growth and inflation respond to the energy supply shock and tighter policy.

The market expects headline inflation to ease to 4.4% YoY in April, with the trimmed mean likely to nudge higher to 3.4%. An outcome in line with this, combined with last week’s softer labour force report, should see the RBA keep rates on hold at 4.35% when it meets next month. The Australian rates market starts the week pricing in 3 bp of RBA rate hikes for June and a total of 28 bp of hikes for the duration of 2026.

All groups CPI and trimmed mean chart