Australia’s services sector experienced growth in July, starting the second half of 2025 on a strong note, as reported by S&P Global. New business increased considerably, and export demand stabilised following four months of declines, leading to faster job creation.

Despite the positive current data, the Future Activity Index indicates weaker confidence about the outlook, suggesting businesses remain cautious in the face of potential challenges ahead. Inflationary pressures have intensified, with increases in both input costs and output prices.

Anticipated Interest Rate Cuts

S&P Global Market Intelligence anticipates further interest rate cuts later in the year, despite the inflationary environment. The latest PMI data reflects stronger economic momentum overall, with services growth bolstered by a rebound in manufacturing activities.

The strong July data for Australia’s services and manufacturing sectors points to solid economic momentum. This suggests that the Australian stock market, specifically the ASX 200 index, has room to climb in the immediate term. We should consider buying near-term call options on the index to capture this potential upside.

To support this view, we can look at the latest figures from the Australian Bureau of Statistics, which showed last week that retail sales for the June 2025 quarter grew by 1.2%, beating expectations. This strength in consumer spending directly benefits companies in the services sector. Therefore, buying calls on major consumer discretionary and financial stocks could also be a profitable strategy.

Outlook for the Australian Dollar

However, the outlook for the Australian dollar is different. Despite rising inflation, the continued expectation of interest rate cuts later this year will likely put downward pressure on the currency. We should look at buying put options on the AUD/USD pair, positioning for a decline in the coming weeks.

We saw a similar dynamic in 2022, when the Reserve Bank of Australia (RBA) was slower to raise rates than other central banks, causing the Aussie dollar to lag. The RBA’s own minutes from its July 2025 meeting seemed to prioritize supporting employment over aggressively tackling inflation. This reinforces our view that the central bank will remain dovish, making a weaker dollar more likely.

The conflicting signals between current strong activity and weaker future confidence suggest a rise in market volatility. The business caution about the months ahead means any rally could be short-lived or face a sudden reversal. Using options to make these trades is wise, as it defines our maximum risk if sentiment shifts unexpectedly.

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