The Australian Dollar (AUD) has gained strength after the Reserve Bank of Australia (RBA) raised interest rates by 25 basis points to 3.85%, which was in line with expectations. RBA Governor Michele Bullock highlighted the importance of controlling inflation, which is still above the target. As a result, the AUD/USD pair climbed 1% to 0.7020.
In the US, the Bureau of Labor Statistics has delayed data releases because of a partial government shutdown. The US Dollar Index is staying below 97.50, despite a 0.5% rise on Monday. US stock index futures are fluctuating between 0.1% and 0.5%.
Gold has bounced back, recovering from a 4% loss to rise nearly 5%, now trading just below $4,900. Silver has also made a comeback, climbing 8.5% after a 7% drop, now priced above $86. The EUR/USD has gone above 1.1800 due to selling pressure on the USD, while GBP/USD is slightly higher at around 1.3700.
USD/JPY increased by over 0.5% but has stabilized around 155.50. The European Central Bank will announce its monetary policy decisions on Thursday, which could further influence currency movements.
The Australian Dollar’s value is shaped by RBA decisions, trade balances, iron ore prices, and economic conditions in China—all of which affect AUD demand. Interest rates and economic health in China, Australia’s main trading partner, are also vital.
The RBA’s rate hike to 3.85% creates a noticeable contrast with the US, which is dealing with a government shutdown. This difference suggests that the Australian Dollar may have an advantage over the US Dollar. We should consider buying call options on AUD/USD to take advantage of this expected rise in the near future.
However, a key risk to this outlook is the state of the Chinese economy. In 2025, we saw its official manufacturing PMI struggle to stay above the 50-point mark, indicating a weak recovery. Any further signs of trouble from China could limit recent gains for the AUD.
On a positive note, we need to keep an eye on iron ore prices, which provided solid support last year while consistently trading above $130 a tonne. This price stability was tied to expectations of Chinese economic stimulus, which bodes well for the AUD. Derivative positions should be prepared for potential fluctuations if prices fall below this important level.
The US data blackout is a significant factor, leading to short-term dollar weakness due to uncertainty. We recall the market’s volatility during the last government shutdown at the end of 2024, when data releases were on hold for weeks. Once government funding is restored, the backlog of employment and inflation data is likely to trigger a surge in market volatility.
Given the positive market sentiment reflected in rising stock futures, it makes sense to pair the strong Aussie with a weaker safe-haven currency. Thus, the AUD/JPY cross appears particularly appealing for long positions. This strategy benefits from the RBA’s firm stance and a growing appetite for riskier assets.
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