The Australian Dollar (AUD) fell against the US Dollar (USD), losing its daily gains as the USD strengthened. This happened even with rising expectations for Federal Reserve rate cuts. In November, Private Sector Credit in Australia grew by 0.6% monthly and 7.4% annually, the fastest growth since January 2023. Meanwhile, the US Consumer Price Index (CPI) dropped to 2.7% in November, and the core CPI rose by 2.6%, both below what the market expected. The US Dollar Index, which tracks the USD against six key currencies, hovered around 98.50. With inflation numbers cooling, the chance of US Federal Reserve rate cuts increased. The CME FedWatch tool indicated a 72.3% probability that rates would stay the same in January, while the likelihood of a 25-basis-point cut rose to 27.7%.

Australian Economic Overview

By February, many believe the Reserve Bank of Australia (RBA) may raise rates, with major banks suggesting earlier tightening due to ongoing inflation. Australia’s unemployment rate held steady at 4.3% in November, despite a drop in employment change. Technical analysis showed a weakening bullish bias for the AUD/USD pair, although some positioning hinted at possible upside momentum. Currently, the AUD remains in a strong support zone against major currencies, influenced by interest rates, trade balance, and the Chinese economy. As of December 19, 2025, the Australian dollar is dipping against the US dollar, but this appears to be a short-term response. The overall outlook for the coming weeks suggests a tension between two different central bank strategies. The US Federal Reserve seems to be easing up, while the Reserve Bank of Australia is taking a firmer stance. The case for a weaker US dollar is strengthening. US inflation for November came in lower than expected at 2.7%, and recent data showed weekly jobless claims shot up to 245,000, much higher than the 220,000 forecast. This indicates a cooling US economy, which may prompt the Fed to consider rate cuts early next year.

Market Predictions For Traders

On the other hand, the Australian economy shows signs of ongoing inflation, which supports the Aussie dollar. Consumer inflation expectations recently rose to 4.7%. Strong demand from China, which reported a 6.9% year-over-year increase in industrial production for November, is likely to support Australian commodity exports. This could push the RBA to maintain or even raise rates. The market is already factoring in this divergence. Traders expect at least two rate cuts from the Fed in 2026, while the swaps market suggests a 41% chance of an RBA rate hike by March. This growing gap in interest rate policies is the key theme for trading. For derivatives traders, this environment likely means increased volatility in the AUD/USD pair. The conflicting pressures could cause erratic price movements in the short term, making strategies like buying straddles appealing to profit from significant price swings. The VIX Index, which measures expected market volatility, has been rising, moving from 12.1 in early December to 13.4 this week, indicating that traders are preparing for larger price changes. Considering these fundamentals, the recent dip in the AUD/USD toward the 0.6600 level seems more like a buying opportunity than the beginning of a new downtrend. The hawkish RBA and dovish Fed create strong support for the Australian dollar. We could see the pair test its recent three-month high of 0.6685 in the coming weeks. Create your live VT Markets account and start trading now.

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