The AUD/USD pair has fallen to around 0.6620 after reaching a three-month high of 0.6686. This change is due to the US Dollar strengthening as market expectations rise that the Federal Reserve will pause further interest rate cuts after already reducing them by 75 basis points this year. Right now, the US Dollar Index is up by 0.4%, around 98.60. Market signals indicate there is a 20% chance the Federal Reserve will cut rates by 25 basis points in January. According to the US Nonfarm Payroll data, the unemployment rate hit 4.6% in November, the highest level since September 2021.

Impacts of Inflation Statistics

The Federal Reserve’s policy will hinge on the upcoming US Consumer Price Index data for November. In Australia, the Reserve Bank is expected to keep interest rates steady since inflation is above the target range. An increase in the unemployment rate, which measures the percentage of the labor force actively seeking jobs, is typically negative for the US Dollar. However, we cannot determine market movements by unemployment rates alone; broader employment data is crucial. The Australian dollar’s dip to 0.6620 is mainly due to the US dollar’s strength, driving the DXY index up to 98.60. After the Federal Reserve cut rates by 75 basis points throughout 2025, the market now believes the bank will stay on hold. This weakness in AUD/USD reflects traders unwinding positions that bet on more aggressive Fed cuts. Yesterday’s US jobs report shows the unemployment rate rose unexpectedly to 4.6%, up from 3.9% at the start of 2025. While a weak labor market usually puts downward pressure on the dollar, the market is currently ignoring this data, focusing instead on the Fed’s firm stance. Fed Chair Powell’s statement that the “bar is very high” for another rate cut will be challenged if job weakness continues into the new year.

Future Monetary Policy Considerations

All attention is on tomorrow’s US Consumer Price Index (CPI) for November. We’re looking for signs of persistent inflation, with forecasts estimating a 3.2% year-over-year increase, slightly down from October’s 3.4%. A higher-than-expected number would support the Fed’s pause and could push the AUD/USD lower, while a significant drop could revive January rate cut expectations. Given the uncertainty surrounding tomorrow’s inflation report, traders are using options to manage risk. Buying puts on the AUD/USD is a way to profit from a stronger CPI that would enhance the US dollar. Higher implied volatility means options are more expensive, but this cost may be necessary to deal with the upcoming data. On the Australian side, the Reserve Bank of Australia offers little reason to anticipate weakness in the Aussie dollar. The RBA has kept its cash rate steady at 4.35% for over a year to control inflation above the target. The clear policy divergence from the Fed supports the AUD/USD’s rise to its recent highs near 0.6686. Looking forward, we need to consider whether the Fed can maintain its pause if the labor market continues to weaken, as it has recently. We’ve seen this scenario before, like in 2006, when the Fed halted rate hikes only to later cut aggressively as the economy weakened in 2007. A similar situation could happen in 2026 if inflation drops rapidly while unemployment rises. Create your live VT Markets account and start trading now.

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