The Australian dollar surged to the highest level in years, making it one of the best-performing currencies this year. The AUD/USD exchange rate rose for five consecutive days, reaching a high of 0.6895, much higher than the year-to-date low of 0.6662. 

Australian dollar has surged amid potential RBA and Fed divergence

The main reason why the AUD/USD exchange rate has surged in the past few months is the rising optimism that the Federal Reserve will diverge with the Reserve Bank of Australia (RBA).

Most analysts now believe that the RBA will decide to hike interest rates by 0.25% in the next meeting because of the ongoing performance of the economy.

A report released last week showed that the Australian labor market continued growing in December. The economy added over 60,000 jobs, most of which were full-time. 

It also showed that the unemployment rate improved, while the participation rate rose. Everything in this report was much better than what analysts were expecting.

The next key catalyst that will determine whether the bank will hike rates will be the upcoming Australian inflation report that comes out on Wednesday this week. Economists exect the report to show that the headline consumer inflation rose 0.9 per cent in December, leading to a 3.6% annual increase. 

The closely-watched trimmed and weighted mean CPI number is expected to remain above 3%. Therefore, if these numbers are accurate, it means that the RBA will hike rates from the current 3.6% to 3.85% in the next meeting.

The rising odds of RBA rate hike explains why bond yields have surged in the past few months. Data shows that the ten-year yield rose to 4.85%, its highest point since December last year. 

On the other hand, analysts believe that the Federal Reserve will deliver more rate cuts this year despite the strength of the American economy. The unemployment rate and the headline and core inflation rates are still contained, while the economic growth is strong.

Therefore, the Fed and RBA divergence will create a carry trade opportunity where investors borrow the cheaper US dollar to invest in the higher-yielding Aussie.

AUD/USD technical analysis 

AUD/USD pair chart | Source: TradingView

The weekly chart shows that the AUD/USD exchange rate has been in a strong bull run in the past few months. It jumped to a high of 0.6896, its highest level since September 2024. 

The pair has moved above all moving averages and formed an inverted head-and-shoulders pattern. These patterns often lead to more upside. Also, the Relative Strength Index (RSI) and the MACD indicators have all pointed upwards. 

Therefore, the most likely scenario is where the pair continues rising, with the next key level to watch being at 0.7000. A drop below the support at 0.6680 will invalidate the bullish outlook.

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