The AUD/USD pair has increased by 0.5%, now trading close to 0.6520 during the European session. The Australian Dollar is performing well as the Reserve Bank of Australia (RBA) may not aggressively cut interest rates anytime soon. RBA Assistant Governor Sarah Hunter spoke at a conference and highlighted rising inflation risks. She noted that inflation could be stronger than expected, and economic and labor conditions are tighter than previously thought.

Q3 Consumer Price Index Report

The Q3 Consumer Price Index report, coming out later this month, may provide clues about inflation trends. Ongoing tensions between the US and China could affect the Australian Dollar, given Australia’s reliance on exports to China. This week, all eyes are on Australia’s September employment data, which will be released on Thursday. Expectations suggest that the Unemployment Rate might rise from 4.2% in August to 4.3%. The US Dollar is experiencing a pullback as more people anticipate interest rate cuts from the Federal Reserve. The CME FedWatch tool shows a 94.6% chance of a 50 basis points reduction before the year ends. Fed Governor Michelle Bowman is in favor of further rate cuts due to a slowing job market. She forecasts two more cuts by the end of the year, impacting the US Dollar.

Policy Divergence Between RBA and Fed

The AUD/USD is gaining momentum towards 0.6520, largely thanks to the RBA’s firm stance on interest rates. Hunter’s comments about rising inflation risks indicate that the RBA isn’t in a hurry to reduce rates, which is very different from the approach of the US Federal Reserve, which is expected to ease further. The significant theme for the coming weeks is the growing discrepancy between the cautious RBA and the dovish Fed. The Fed is suggesting two more rate cuts in 2025, as reiterated by Governor Bowman, putting pressure on the US Dollar. Meanwhile, the RBA has kept its cash rate steady at 4.35% for a long time, since its last increase in late 2023, emphasizing its careful, data-driven approach. Upcoming economic data will be crucial, with Australian employment figures coming this Thursday and the Q3 CPI report later this month. We are observing increased short-term implied volatility in the options market as traders prepare for these releases. The consensus expectation for unemployment is a slight rise to 4.3%. If this figure falls short, it could trigger a notable market reaction. Given the current environment, buying AUD/USD call options seems like a wise strategy to position for potential gains. This approach provides a defined-risk opportunity to take advantage of a potentially higher-than-expected inflation report or surprising jobs data. For example, a better-than-anticipated CPI reading, similar to the persistent 3.6% annual rate seen for Q1 2025, could reinforce the RBA’s hawkish position and push the AUD/USD pair higher. Alternatively, those looking to benefit from the heightened volatility might consider selling out-of-the-money put spreads. This strategy allows us to collect premium while expressing the belief that the AUD/USD will likely stay above key levels, such as 0.6400, during the upcoming data releases. It can yield benefits if the pair moves higher, remains steady, or decreases only slightly. We must also keep an eye on the larger global landscape, especially trade relations between the US and China. Australia’s heavy reliance on exports to China means that any negative news could quickly limit the gains of the Aussie dollar. This remains a major external risk that could overshadow domestic factors. Create your live VT Markets account and start trading now.

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