The Australian dollar is entering a potentially decisive phase against the US dollar. Australia’s relatively high interest rates could attract demand for the Australian dollar, but the pair’s direction will also depend on the Federal Reserve. If Australian inflation remains persistent at the same time, investors could increasingly price a widening interest-rate differential in Australia’s favour. The most supportive environment for the Australian dollar would be one in which Australian inflation proves persistent while US price pressures continue to moderate. Core CPI, Treasury yields and changes in rate expectations will be crucial signals in determining which scenario gains the upper hand.