AUD/USD Analysis: Pullback Risks Increase as USD Regains Support

AUD/USD is starting to show signs of exhaustion after briefly reaching fresh 15 month highs. A combination of renewed US dollar strength and stretched technical conditions suggests the pair may be vulnerable to a near term pullback. That said, downside momentum in the Australian dollar is likely to remain measured, as domestic inflation is still running above the Reserve Bank of Australia’s target, keeping monetary policy restrictive.

Australian Inflation: Cooling, but Still Uncomfortably High

Australia’s November inflation data showed modest easing, but price pressures remain sticky. Trimmed mean CPI slowed to 3.2% year on year, while headline CPI eased to 3.4%. Both readings remain above the RBA’s 2 to 3% target band.

Housing continues to be the dominant inflation driver, contributing 1.1 percentage points and accounting for over 21% of the CPI basket. While this data reduces the urgency for further rate hikes in early 2026, it offers no justification for rate cuts either.

Policymakers are likely to wait for confirmation from the Q4 CPI release on 28 January before assessing whether the February meeting is live. Governor Bullock hinted at this in December. Until inflation shows clearer progress toward target, the RBA’s policy bias remains firmly restrictive, helping to limit aggressive downside in AUD/USD.

US Dollar Finds Short Term Support

The US dollar index began the year with a rebound, hinting at a potential interim swing low around 97.50. Price action has broken above last week’s bullish inside candle and the prior week’s bearish engulfing pattern, signalling further near term upside risk.

While this rebound suggests USD bulls have regained some footing, broader technical structure argues against a sustained move back above the 100 level. A completed wave C correction on the weekly chart keeps the medium term bias tilted toward fading extended dollar rallies. In that context, AUD/USD buyers may prefer to wait for dips rather than chase strength at current levels.

AUD/USD Technical Outlook

On the daily chart, AUD/USD briefly pushed to a 15 month high before reversing sharply lower by the close, driven by renewed USD strength. This price action formed a shooting star candlestick, reinforced by bearish RSI divergence, both of which warn of a near term pullback.

Initial downside risk lies below the September high at 0.6707 and the psychological 0.6700 level. A break here could see price retrace toward the 20 day simple moving average near 0.6675.

A deeper correction would likely require Australian data to undershoot expectations. However, a decisive break below 0.6660 would expose the 50 day SMA and prior swing highs and lows around 0.6592.

Positioning: Sentiment Not Yet Extreme

COT data shows futures traders remain net short AUD/USD, though long exposure continues to build among large speculators and asset managers. Short positions have only edged slightly higher among large specs and have largely flattened among asset managers.

With positioning not yet stretched, there is room for futures traders to flip net long in the weeks or months ahead, provided no fresh bearish catalyst emerges for the Australian dollar.

Bottom Line

AUD/USD is facing near term pullback risks after an extended rally, driven by technical exhaustion and a stabilising US dollar. However, elevated Australian inflation and a restrictive RBA stance continue to underpin the medium term outlook. Unless domestic data deteriorates meaningfully, any downside is likely to be corrective rather than trend changing.