The divergence in monetary policy between the RBA and the Fed has started to help AUD/USD bears. Combined with a correction in the S&P 500 and negative news from China, this is weighing on the Australian dollar. Let’s discuss this topic and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Markets do not expect the RBA to raise rates in 2026.
- The S&P 500’s decline is weighing on the Australian dollar.
- China’s economy is beginning to show signs of strain.
- Short trades on the AUD/USD pair can be considered on a rebound from 0.7135 and 0.7155.
Weekly Fundamental Forecast for Australian Dollar
The Australian dollar has lost its key advantages, with AUD/USD quotes falling to five-week lows. The decline risks continuing if geopolitical tensions in the Middle East escalate and global risk appetite weakens.
The aussie started 2026 on a high note and held a leading position in the Forex market until the attacks on Iran. By the end of spring, the Australian currency had been overtaken by the Russian ruble, the Israeli shekel, the Norwegian krone, and the Brazilian real. The previous drivers of the AUD/USD pair’s rally—monetary policy divergence, rising global risk appetite, and China’s robust economy—had lost steam.
In May, the Reserve Bank of Australia raised the key rate for the third time to 4.35%, believing that its current level would constrain economic growth to a lesser extent than in 2025. At the same time, the RBA meeting minutes revealed that tightening monetary policy would provide time to assess the impact of the conflict in the Middle East on inflation and the labor market.
AUD/USD Rate and Australia-US Bond Yield Spread
Source: Bloomberg.
Investors interpreted this rhetoric as a signal of a pause in the cycle of monetary tightening. The futures market currently prices in only a 40% probability of another cash rate hike in 2026. By comparison, CME derivatives put the odds of further Fed monetary tightening at 55%. The divergence is no longer working in the aussie’s favor, leading to a narrowing of the yield spread between Australian and US bonds and a decline in AUD/USD quotes.
Speculation about a federal funds rate hike triggered a pullback in the S&P 500 index, dampened global risk appetite, and stripped the Australian dollar of yet another advantage. Investors are hedging against the risk of a decline in US stock indices. The Russell 2000 is seeing the most active hedging activity. This makes sense, as small-cap companies will be the first to suffer from the Fed’s monetary policy tightening.
Cost of Hedging Risk on Investments in US Stocks
Source: Bloomberg.
Another blow to the AUD/USD pair came from disappointing news out of China. China reported its slowest retail sales growth in April since December 2022. Weak domestic demand is so far offset by rapid export gains, but existing economic imbalances are prompting foreign investors to take their money elsewhere. As a result, the yuan and related proxy currencies are weakening.
Weekly AUDUSD Trading Plan
Nothing in this world lasts forever. All three key drivers supporting AUD/USD quotes are losing momentum, increasing the risk of a pullback within the broader uptrend. If the S&P 500 rally following NVIDIA’s strong earnings report turns out to be the final leg of the equity market advance, traders may sell the aussie at 0.7135 and 0.7155.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
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