The Australian Dollar started the week strong thanks to good news about US-China trade talks. It is encouraging that the US has decided not to impose 100% tariffs on Chinese goods, which creates a positive outlook. Meanwhile, the US Dollar is facing pressure due to softer inflation data, increasing the chances of a rate cut by the Federal Reserve. After an initial rise, the AUD fell against the USD, driven by hopes of a resolution in US-China trade. Upcoming inflation data from Australia will likely affect the Reserve Bank of Australia’s decisions. Talks between US and Chinese officials have led to progress on critical issues, setting the stage for an upcoming meeting between President Trump and President Xi Jinping.

US Dollar Index and Federal Reserve Rates

The US Dollar Index is stable, staying around 98.90, due to expectations of a Federal Reserve rate cut following weaker CPI data. In September, the US CPI rose by only 3.0% year-over-year, which was lower than expected. This has led to a 97% chance of a rate cut in October, sparking speculation about future economic policies. In technical terms, the AUD/USD is trading at about 0.6530, with resistance at 0.6550. If this resistance breaks, it could push the pair toward the 12-month high of 0.6707. On the other hand, a drop could bring AUD/USD down to its four-month low around 0.6414. The Australian dollar is influenced by both positive global news and weak local data. Hopes for a US-China trade deal are a strong factor, especially with major tariffs now off the table. Recent data from China shows a 5% increase in Australian iron ore imports for the third quarter of 2025, adding to the positive sentiment. The weakness of the US dollar is also benefiting the Aussie. After aggressive rate hikes in 2022 and 2023 to control inflation, the Federal Reserve is clearly changing direction. Markets expect a near-certainty of a rate cut, which should keep the US dollar weak in the weeks ahead.

Domestic Economic Challenges in Australia

However, Australia’s domestic economy is showing warning signs that shouldn’t be ignored. The Reserve Bank of Australia (RBA) is in a difficult position, with recent data showing Q3 GDP growth at just 1.5% annually. With manufacturing declining and unemployment rising, expectations for an RBA rate cut are high, which could limit any significant gains for the AUD. For derivative traders, the mix of these competing forces suggests increased volatility. Implied volatility on one-month AUD/USD options has risen to over 12%, indicating market uncertainty before crucial central bank meetings. This situation might favor strategies like straddles, which benefit from big price movements in either direction. The key technical level to watch is the 0.6550 resistance, which has remained strong. If this level is successfully cleared, it could lead to a significant upward move, making call options appealing. However, if it holds, the pair might quickly drop back toward the 0.6400 support, in which case put options would be profitable. Additionally, the Australian dollar is performing well against the Japanese Yen. Given Japan’s fiscal challenges, a long AUD/JPY position could be a better way to bet on the positive trade deal news without the risks from a potential RBA rate cut versus the US dollar. Create your live VT Markets account and start trading now.

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