AUD/USD is stabilizing under 0.6700, currently around 0.6680 in the Asian session after slight losses earlier. The US Dollar is strengthening despite US inflation data being lower than expected, hinting at possible interest rate cuts by the Federal Reserve. In December, the US Core Consumer Price Index increased by 0.2%, falling short of market forecasts, while annual core inflation remained steady at 2.6%. This indicates easing inflation, but strong job figures suggest a solid labor market.

Support for the Australian Dollar

The Australian Dollar may receive support from expected rate hikes by the Reserve Bank of Australia (RBA). In November 2025, dwelling approvals in Australia rose by 15.2%, showing strong housing demand and possibly influencing inflation concerns for the RBA. Upcoming trade balance data from China is expected, with a projected surplus of $113.60 billion for December. Year-over-year, exports are predicted to increase by 3.0% and imports by 0.9%. China’s economic situation, a significant trading partner for Australia, directly affects the Australian Dollar, with any changes impacting AUD exchange rates. The value of AUD is influenced by RBA interest rates and iron ore prices, Australia’s top export. Export demand plays a crucial role, making the trade balance a key focus. As AUD/USD hesitates below the important 0.6700 level, there’s clear tension that derivative traders can take advantage of. The US Dollar’s unexpected strength, despite December 2025’s inflation data indicating future rate cuts by the Federal Reserve, creates uncertainty that is favorable for options strategies aiming for a specific move or a surge in volatility.

Effects of Inflation and Rate Cuts

The lower US core inflation figure of 2.6% for 2025 is a big drop from the 3.9% seen at the start of 2024, strongly indicating that the Fed’s next action will likely be a rate cut. Market pricing is now aggressively factoring in several rate cuts for the year, similar to late 2023. Traders may consider buying AUD/USD call options to bet on US Dollar weakness once the market fully processes this dovish inflation news. On the other hand, the Australian Dollar has its own strengths, especially with the booming housing market reflected in the 15.2% rise in dwelling approvals from November 2025. This domestic inflationary pressure could push the RBA to adopt a more aggressive stance than currently expected. The potential policy split, with the RBA increasing rates and the Fed decreasing them, forms a solid basis for a long AUD/USD position. However, the immediate focus is on China’s trade data, a vital factor for the Australian economy and its currency. Iron ore prices, which were mainly above $120 a ton throughout 2024, are highly influenced by Chinese industrial demand reported in this data. A positive surprise could boost the AUD, making short-dated call options an appealing way to trade this event. Given these opposing yet powerful forces, we recommend traders use derivatives to manage risk and speculate on outcomes. Buying call spreads on AUD/USD can be a cost-effective strategy to bet on the currency rising due to the anticipated policy divergence in the coming weeks. For those more cautious about the China data, purchasing puts can provide a cheap hedge against a downside surprise that temporarily strengthens the US Dollar. Create your live VT Markets account and start trading now.

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