The Australian Dollar reached a 14-month high of 0.6727, driven by rising hopes for interest rate hikes from the Reserve Bank of Australia (RBA). The RBA has suggested it might tighten policies if inflation doesn’t fall. The next Consumer Price Index (CPI) report on January 28 is crucial. China’s recent plan to invest in key sectors may also impact the AUD because of Australia’s trade connections. However, the tense geopolitical situation in Asia, especially around Taiwan, poses risks to the markets.

US Dollar Index and Federal Reserve Policy

The US Dollar Index (DXY) bounced back to around 98.10, even though many expect more rate cuts from the Federal Reserve. In 2025, the Federal Reserve lowered rates by 75 basis points, with an 81.7% chance that rates will stay the same in January. In the US, economic data showed a 4.3% GDP growth in Q3 and improved jobless claims. Meanwhile, Australia’s inflation was high at 3.8% in October 2025, leading to predictions of a rate hike in February 2026. The AUD/USD remains strong, indicating a bullish trend, but it may hit resistance at 0.6727. If it doesn’t break through, a decline could occur, although it stays above the rising nine-day EMA. China’s economy is crucial for the Australian Dollar because Australia exports a lot of iron ore there. Iron ore prices also affect the AUD and the trade balance, which impacts currency value. With the Australian Dollar at a 14-month high, we see an opportunity due to different central bank policies. The Reserve Bank of Australia may raise interest rates, while the Federal Reserve might keep cutting in 2026. This difference in policies is a key reason to position ourselves in the coming weeks.

Opportunities and Risks with the Australian Dollar

Supporting this view, Australia’s inflation was 3.8% in October 2025, remaining well above the RBA’s target range. We saw the RBA take decisive action during the 2022-2023 hiking cycle to control inflation. Additionally, with iron ore prices staying strong above $140 per tonne due to anticipated Chinese stimulus, the outlook for the Australian Dollar looks solid. Traders who believe the AUD/USD will keep rising can consider buying call options. For instance, purchasing February 2026 call options with a strike price of around 0.6800 could take advantage of a potential RBA rate hike following the January 28 inflation report. This strategy allows for significant upside while limiting our maximum loss to the premium paid. To lower the upfront cost, a bull call spread could be an option. This means buying one call option while selling another with a higher strike price. For example, buying a February 0.6750 call and selling a February 0.6850 call would reduce initial expenses. This strategy allows for gains if the AUD/USD rises moderately, but it caps our profits. However, we must be cautious of risks, as technical charts show that the pair is currently overbought. The upcoming FOMC minutes might reveal a more hawkish stance, which could boost the US Dollar and cause a pullback. Additionally, the increasing military activity around Taiwan presents a geopolitical risk that could lead investors to seek the safety of the US Dollar. To protect against these risks or position for a downturn, we might buy inexpensive out-of-the-money put options. Purchasing a January 2026 put option with a strike price of around 0.6600 could provide crucial protection against a sudden drop in the AUD/USD. This would work as a low-cost insurance policy if positive sentiment quickly shifts. China’s economic health is still critical for the Australian Dollar, and positive news about targeted fiscal stimulus is encouraging. The latest Caixin Manufacturing PMI for December 2025 was 51.5, indicating growth in the manufacturing sector. We need to closely monitor Chinese data releases, as they will greatly impact Australia’s trade outlook and currency value. Create your live VT Markets account and start trading now.

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