AUD/USD has weakened as the US Dollar gains strength after the latest US inflation report. The US Consumer Price Index (CPI) increased by 0.3% month-over-month (MoM) in December, meeting expectations. Meanwhile, core CPI rose by 0.2% MoM, slightly below forecasts.

Slowing Inflation

Annual headline inflation stayed at 2.7%, while core inflation held at 2.6%. These numbers indicate a gradual slowdown in inflation, which affects expectations for future Federal Reserve rate cuts. Fed President Alberto Musalem mentioned that inflation is near 3% and is likely to drop as the labor market cools. In Australia, consumer confidence declined, which offers limited support for the AUD. Several key factors influence the Australian Dollar, including the Reserve Bank of Australia’s interest rates, iron ore prices, and China’s economic performance. Generally, higher interest rates boost the AUD, while stronger economic growth in China increases demand for Australian exports. Iron ore, a major Australian export, significantly impacts the AUD’s value. A positive Trade Balance, where exports exceed imports, strengthens the AUD as foreign demand for Australian goods rises. Upcoming US economic data and comments from Fed officials will be important for insights on monetary policy.

Recent AUD/USD Trends

The current situation mirrors what happened in early 2025, with the AUD/USD pair facing pressure. US inflation data for December 2025 showed a slight increase to 3.2%, which has kept the Federal Reserve from indicating any immediate rate cuts. This scenario has strengthened the US Dollar and pushed the Aussie down to around 0.6550. The Fed’s careful approach is supported by a strong labor market; futures markets now only see a 15% chance of a rate cut by March. This represents a notable shift from just a month ago and suggests that the dollar will likely remain strong in the short term. We expect high implied volatility in dollar pairs as traders adjust their expectations for rate cuts later in the year. On the Australian side, Q4 2025 inflation stayed stubbornly high at 4.0%. This situation puts the Reserve Bank of Australia in a tough spot, unable to consider easing while the US remains firm. This difference in policy is a significant factor pulling down the Australian dollar. Additionally, iron ore prices, crucial for the Aussie, have recently fallen below $120 per tonne amid worries about China’s property sector. The latest mixed PMI data from China doesn’t help this sentiment, further pressuring the currency. Given this context, traders should think about strategies to benefit from a falling or stable AUD/USD in the coming weeks. Buying put options could provide a straightforward bearish play with defined risk, while selling out-of-the-money call spreads might be a good strategy to collect premiums if we expect the pair to decline or move sideways. Keep an eye on key support around the 0.6500 level; breaking below this could lead to more selling. Create your live VT Markets account and start trading now.

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