## Australia’s Economic Data The Australian Dollar (AUD) bounced back against the US Dollar after three days of declines. This recovery happened as the US Dollar weakened. Concerns arose over Federal Reserve Chair Jerome Powell, who is facing a criminal investigation related to a project at the central bank. In December, ANZ Job Advertisements fell by 0.5%, following a drop of 1.5% in November. Household spending rose by 1.0% in November, down from October’s 1.4% increase, as consumers remained cautious due to high interest rates and ongoing inflation. The mixed Consumer Price Index (CPI) data for November leaves the Reserve Bank of Australia’s (RBA) policy outlook uncertain. However, Deputy Governor Andrew Hauser indicated that the inflation data was expected. Interest rate cuts in Australia don’t appear likely soon, with attention turning to the upcoming quarterly CPI report for insight on the RBA’s future decisions. ## Currency Dynamics The US Dollar Index (DXY) is down, trading around 98.90, as expectations of a dovish Federal Reserve grow. US Nonfarm Payrolls increased by 50,000 in December, which was below expectations. Meanwhile, the unemployment rate dropped to 4.4%, and Average Hourly Earnings increased by 3.8% year-on-year. Fed funds futures imply a 95% chance that rates will stay the same at the next Federal Reserve meeting. The US Department of Labor noted a slight rise in Initial Jobless Claims, suggesting a gradual increase in unemployment benefit applications. When comparing currencies, the AUD is performing best against the Japanese Yen. Its percentage changes against major currencies include: US Dollar (-0.17%), Euro (-0.08%), British Pound (+0.17%), Japanese Yen (-0.11%), Canadian Dollar (-0.07%), and New Zealand Dollar (-0.19%). Central banks aim for price stability through policy rate adjustments. Independent boards make monetary policy decisions, often led by a chairman who wields decisive power in tiebreaker votes. ## Strategies and Market Reaction The investigation into the Fed Chair is creating significant uncertainty. Events like this usually weaken the currency in question, leading us to expect continued pressure on the US Dollar. This situation likely indicates increased volatility for major currency pairs involving the dollar. With the US Dollar facing pressure, we should consider strategies that favor a rising AUD/USD. One possibility is to buy call options on the Australian Dollar, which allows us to benefit from upward movement while limiting potential losses to the premium we pay. Our initial target for long positions is the technical level of 0.6766. The market is already reacting to this uncertainty. One-month implied volatility on AUD/USD options has surged to 11.5%, the highest level since market turbulence in mid-2025. This suggests that other traders anticipate larger price swings in the upcoming weeks. We need to factor in the higher costs of options for our trading choices. Looking at interest rate expectations, the CME FedWatch tool now indicates a 45% likelihood of a rate cut by March, a significant rise from the 30% chance noted just last week. This change suggests that the market thinks the new uncertainty might push the Fed to act or adopt a more dovish stance. This reinforces expectations for a weaker US Dollar for now. However, we must closely monitor the Australian side as well. Although the Reserve Bank of Australia is not expected to cut rates soon, the quarterly inflation report, due around January 28, poses a significant risk. A lower-than-expected inflation figure could weaken the Aussie Dollar and offset the US Dollar’s softness. Historically, times of leadership uncertainty at the Federal Reserve often lead to a sell-off of the dollar until clarity emerges. We need to stay updated on news related to the Fed investigation, as this will likely drive market sentiment. If AUD/USD cannot hold the 0.6700 support level, it might indicate that Australia’s economic weaknesses are starting to overpower the US Dollar’s issues. Create your live VT Markets account and start trading now.

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