The Australian Dollar (AUD) strengthened against the US Dollar (USD) on Monday after China’s central bank, the People’s Bank of China (PBOC), kept its Loan Prime Rates steady. The one-year and five-year rates remained at 3.00% and 3.50%, respectively. Meanwhile, the US Dollar Index, which measures the USD against six major currencies, dropped to about 98.60. Traders are now looking forward to the US Gross Domestic Product figures for the third quarter, which will be released on Tuesday.

Federal Reserve’s Current Position

According to the Federal Reserve’s Hammack, the policy is currently on hold to evaluate the effects of earlier rate cuts. The University of Michigan revised its Consumer Sentiment Index for December to 52.9, down from 53.3, while one-year Inflation Expectations increased to 4.2%. The CME FedWatch tool indicates a 79.0% likelihood that the Federal Reserve will keep rates steady in January, with a 21.0% chance of a 25-basis-point cut. The US Consumer Price Index for November fell to 2.7%, which is lower than the anticipated 3.1%. The AUD/USD pair is trading around 0.6620, close to the lower edge of an upward trend channel, suggesting a bullish outlook. The nine-day Exponential Moving Average points to a slight uptrend, although further growth depends on market activity. Key resistance levels for the pair are around 0.6685 and 0.6707, while support is noted near 0.6414 in case of downward pressure. The Australian Dollar is showing strength against the US Dollar, and we expect this trend to continue in the short term. The main factor is the difference in central bank policies, with the Reserve Bank of Australia appearing more open to raising rates compared to the US Federal Reserve. Additionally, iron ore prices are stable above $135 a tonne on the Singapore Exchange, driven by hopes of Chinese stimulus, creating a positive outlook for the Australian Dollar.

Economic Data and Market Implications

China’s decision to maintain interest rates provides temporary support, but caution is warranted. Recent data reveals that China’s manufacturing PMI remains below the 50-point mark, indicating economic contraction and a fragile recovery. Any further weakness from China could quickly reverse the Australian Dollar’s gains, posing a significant risk. In the US, the Federal Reserve seems to be pausing after previously cutting rates by 75 basis points earlier this year. This pause, along with lower inflation figures for November at 2.7%, keeps the US Dollar weak. This week’s US GDP figures will be closely monitored, as a stronger-than-expected report could challenge the notion that the Fed is finished cutting rates. The political situation in the US also adds uncertainty that could weaken the Dollar. President Trump’s desire for a new Fed Chair who favors lower interest rates raises questions about the central bank’s independence. This uncertainty makes it hard to commit to a strong US Dollar long-term, potentially leading traders to sell the currency on any rebounds. With the modest uptrend in AUD/USD, it may be wise to use strategies that capitalize on a potential rise towards the 0.6700 level. Buying call options or setting up bull call spreads on the AUD/USD pair might be profitable methods to benefit from this expected upward movement. However, considering the risks from China and upcoming US data, it is sensible to buy some downside protection with put options to safeguard against a sudden downturn. Looking back, a similar scenario occurred from 2009 to 2011, when a hawkish RBA and a dovish Fed led to a substantial rally in the AUD/USD. While history doesn’t repeat exactly, this key difference in central bank policies is significant. Current market pricing, which shows a 27% chance of an RBA rate hike by February compared to almost no chance of a Fed hike, strengthens the bullish case for the Australian Dollar. Create your live VT Markets account and start trading now.

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