The Australian Dollar fell after the US Federal Reserve decided to cut interest rates by 25 basis points. Fed Chair Jerome Powell’s comments lowered hopes for a rate cut in December, leading to the AUD/USD trading at 0.6569, a drop of 0.25%. In a press conference, Powell highlighted differing opinions within the Federal Open Market Committee (FOMC) about future interest rates. He indicated that the current rate may be close to neutral, consistent with the September Economic Projections.

Federal Reserve Decision

Most Fed officials agreed on the rate cut to 3.75%-4%, but two members disagreed. One wanted a larger cut, while the other preferred to keep rates unchanged. The Federal Reserve reported that economic activity is growing moderately. Unemployment remains low, even though job gains are slowing. Inflation is still somewhat high. They also announced they would stop reducing their securities holdings by December 1, as part of their policy adjustments. Australian inflation reports had initially boosted the AUD/USD, raising hopes that the Reserve Bank of Australia might hold rates steady. Still, the Fed’s firm stance limited the Australian Dollar’s rise. The Australian Dollar showed mixed performance against major currencies, performing particularly well against the British Pound. The heat map shows the percentage changes in these currencies for a clear comparison.

Currency Fluctuations

A familiar trend is emerging as the US Federal Reserve takes a cautious stance for the coming months. Previous experiences of “hawkish cuts” remind us that the Fed’s guidance often has a greater impact than the rate cut itself. This situation is creating a noticeable policy gap between a strong Fed and a Reserve Bank of Australia that may need to ease. Recent US inflation data from September 2025 revealed core CPI remains stubborn at 3.5%, while jobs data added 190,000 non-farm payrolls. These stats give the Fed little reason to consider easing, thus strengthening the dollar. The market reflects this change, as the CME FedWatch Tool shows traders have cut the chance of a December 2025 rate cut to just 20%. Conversely, Australia’s latest quarterly inflation report for Q3 2025 showed a cooler-than-expected rate of 3.2%. This increases expectations that the RBA may contemplate rate cuts in early 2026. This growing gap continues to put downward pressure on the AUD/USD, which is now struggling to stay above the 0.6500 mark. For derivative traders, this situation suggests that buying put options on the AUD/USD could be a smart way to prepare for potential further weakness. Implied volatility for AUD/USD options has risen to a three-month high of 11.2%, signaling that the market anticipates bigger price changes ahead. A bear put spread may be useful to lower entry costs while still benefiting from a downward trend. This is not just about the Australian Dollar; it’s also about the strength of the US Dollar. We saw a similar situation in 2024, when a strong dollar pressured most major currencies for a long time. Therefore, traders might also explore strategies that profit from a stronger dollar against other currencies, such as selling call options on pairs like the EUR/USD. Create your live VT Markets account and start trading now.

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