Australia’s Consumer Price Index (CPI) rose by 3.6% year-over-year in December, according to the Australian Bureau of Statistics. This increase follows a revision of the previous rate, now adjusted to 3.5% from 3.4%. The monthly CPI also saw a rise, climbing to 1.0% in December from 0%, which was higher than the predicted 0.7% gain. The Trimmed Mean CPI recorded a monthly increase of 0.2% and an annual increase of 3.3%. Quarterly CPI results showed a 1.0% rise from the previous quarter and a 3.8% increase year-over-year in the fourth quarter. The Reserve Bank of Australia’s Trimmed Mean CPI went up by 0.9% quarterly and 3.4% annually, exceeding market expectations. The Australian Dollar experienced a slight gain, with the AUD/USD pair increasing by 0.04% to trade at 0.7010.

Interest Rate Expectations

Data indicates that the Reserve Bank of Australia might raise interest rates. As inflation rates surpass the RBA’s target of 2%-3%, the likelihood of a rate hike has risen to 63%. Additionally, Australia added 62,500 jobs in December, leading the unemployment rate to drop to 4.1%. These factors have strengthened the Australian Dollar against the US Dollar amid growing uncertainty regarding the latter. Reflecting back to early 2025, inflation data suggested a hawkish stance from the Reserve Bank of Australia. The CPI had risen to 3.6%, heightening expectations for a rate hike cycle that many traders were preparing for. At that time, the Australian Dollar was strong against a weak US Dollar, moving toward the 0.7000 level. Today’s situation is quite different, as the aggressive rate hikes of 2025 have helped to cool the economy. The latest quarterly CPI for Q4 2025 indicates that inflation has dropped to 2.9%, falling back within the RBA’s target range. This change effectively eliminates the possibility of further rate hikes for the foreseeable future. The RBA cash rate has remained steady at 4.35% over the last three meetings, shifting the market’s focus. Employment figures from a year ago have softened, with unemployment inching up to 4.3% in December 2025. This change eases the dual pressures that previously pushed the RBA towards a hawkish approach.

Market Implications

In this new environment, the potential for AUD/USD to rise appears limited. The bullish movement towards 0.7000 in early 2025 has reversed, with the pair now closer to 0.6650. The interest rate advantage expected to elevate the Aussie has already been accounted for by the market. External factors are also creating challenges that weren’t as pronounced last year. Slower growth data from China, an important trading partner, has affected market sentiment. This is evident in the price of iron ore, which has dropped from over $130 per tonne in early 2025 to around $110 per tonne recently. For traders, this suggests a shift in strategy from betting solely on Australian strength to more careful positioning. Selling out-of-the-money call options or using call spreads on AUD/USD could be a smart way to collect premiums, based on the belief that significant gains are unlikely. This approach could profit in a stable or slightly declining currency environment. Given the uncertainty in global growth, buying protective puts on the Australian Dollar may be a useful hedge against a potential downturn. Volatility might rise around future Chinese data releases or RBA announcements, even if policy remains unchanged. As a result, positions designed to benefit from possible spikes in implied volatility, like long straddles, should be considered during significant events. Create your live VT Markets account and start trading now.

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