The Australian Dollar has gained strength against the US Dollar for two days in a row, influenced by rising tensions between the US and Greenland. This comes as the People’s Bank of China maintains its Loan Prime Rates at 3.00% and 3.50%. China’s economic connections are crucial for Australia, due to their trade relationship.

US Tariffs and Inflation

US President Trump has threatened tariffs on eight EU countries over disputes related to Greenland, prompting EU ambassadors to prepare countermeasures. In Australia, inflation has increased to 3.5% year-over-year in December. The Reserve Bank of Australia is watching these developments closely, with the potential for tighter monetary policy due to rising prices. The US Dollar Index is declining as investors respond to the Greenland situation, hovering around 99.00. There has been a surprising drop in US Initial Jobless Claims, indicating fewer layoffs. While core inflation remains stable, data on the labor market and inflation suggest that the Federal Reserve may delay rate cuts, leading to updated projections that now include possible cuts by mid-year. China’s GDP grew by 1.2% in Q4 2025, surpassing expectations and emphasizing China’s influence on the Australian Dollar. As the Australian Dollar rises, interest rates and economic indicators, especially exports like Iron Ore, play essential roles. The AUD/USD pair is showing bullish signs as it trades above crucial technical levels. The Australian Dollar continues to strengthen against a weakening US Dollar, and this trend is likely to persist. The difference in outlook is due to expectations of a stricter Reserve Bank of Australia (RBA) compared to a Federal Reserve that may cut rates later this year, creating favorable conditions for the Aussie dollar. Reflecting on late 2025 data, Australian inflation rates were rising. An RBA official described it last week as “a persistent challenge,” which suggests they will be slow to cut rates. In contrast, the US core inflation rate was at a four-year low of 2.6% in December 2025. These diverging inflation trends are the key factor driving the rise of the AUD/USD pair.

Geopolitical Tension and Technical Analysis

The geopolitical tensions involving the US and Greenland are negatively impacting the US Dollar. The unresolved threat of tariffs against European allies has hurt consumer sentiment, as shown by a drop to 69.5 in the University of Michigan survey last Friday. Traders should consider that if tensions escalate, the US Dollar Index (DXY) could fall below the 99.00 support level, creating potential opportunities to short the dollar against other currencies. This uncertainty raises implied volatility, which makes purchasing options on AUD/USD pricier but potentially more rewarding. We could consider buying call options to profit from an increase in the pair while limiting our risk. Alternatively, if you believe the geopolitical situation will stabilize, you might explore selling volatility through strategies like short strangles, though this comes with greater risk. The strength of the Chinese economy supports the Australian Dollar, as indicated by the robust Q4 2025 GDP and industrial production figures from last week. Iron ore prices, a major Australian export, have risen and are currently around $135 per tonne, a level not seen since late 2023. As long as demand from China stays strong, it offers solid support for the Aussie dollar. We should monitor key technical levels to manage our positions in the upcoming weeks. The pair is well above its nine-day average around 0.6700, and a rise towards the October 2024 high of 0.6766 seems likely. If it falls below the 50-day average at 0.6646, that signals a fading bullish momentum, and we should reassess our positions. Create your live VT Markets account and start trading now.

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