AUD/USD faced challenges at the 0.6700 level for the second day in a row. As we enter the last trading week of 2025, market participants are cautious. The focus is shifting towards the differing paths of central bank interest rates as we head into 2026. The Australian Dollar is dealing with low trading volumes typical at year-end. The Reserve Bank of Australia (RBA) is leaning towards possible rate hikes, while the US Federal Reserve is signaling further rate cuts for 2026.

RBA’s Rate Considerations

The RBA is contemplating rate increases, with futures markets suggesting a 34% chance of a rate hike in February. The Federal Reserve’s recent minutes indicate that it may cut rates again, depending on how inflation continues to trend. Interest rates set by the RBA largely impact the Australian Dollar’s value. Factors like Australia’s wealth in natural resources, iron ore prices, inflation rates, economic growth, and Trade Balance play significant roles as well. China’s economic performance is crucial for the AUD since it is Australia’s biggest trading partner. Strong demand from China typically supports the AUD, as growth in China benefits Australian exports. Iron ore, a key export, also influences the AUD. When iron ore prices rise, it usually strengthens demand for the AUD. A favorable Trade Balance can enhance the AUD’s value by reducing reliance on cheaper imports.

Market Participation and Central Bank Policies

As holiday trading slows down, the different approaches of the RBA and the Fed are becoming the main drivers in the coming weeks. The AUD/USD’s struggle at 0.6700 is likely temporary, offering a potential opportunity as trading picks up in the new year. We expect a shift as central bank policies clarify. The case for a stronger Australian dollar is looking promising. Recent Q3 2025 CPI data shows inflation stuck at 3.8%, which is above the RBA’s 2-3% target. This persistence is prompting futures markets to increasingly anticipate a rate hike at the February 3rd meeting. In contrast, the US dollar is facing pressure as the Federal Reserve appears to favor easier monetary policy. The latest Core PCE data from November 2025 reveals inflation easing to 2.8%, nearing the Fed’s 2% target. This bodes well for potential rate cuts in 2026, highlighting the policy differences with Australia. Additionally, several external factors are boosting the Australian dollar. Iron ore prices remain robust, recently exceeding $135 per tonne, which enhances Australia’s export revenue. Moreover, China’s official manufacturing PMI for December 2025 unexpectedly improved to 50.5, indicating growth and a positive trade outlook for Australia. For traders, this environment suggests buying call options on the AUD/USD pair. With low holiday volatility, acquiring calls that expire after the February RBA meeting could be a strategic move for a potential upward shift. A bull call spread might also help reduce initial costs while maintaining upside potential. Another option is to sell out-of-the-money put options. The higher expected interest rates in Australia compared to the US make this strategy attractive for earning premiums. This approach can generate profits if AUD/USD stays stable or rises, taking advantage of the underlying support that should prevent substantial declines. We’ve seen how significant the impact of diverging central banks can be, recalling the dollar’s surge in 2022 when the Fed raised rates aggressively while others did not keep pace. The current setup as we approach 2026 suggests a favorable condition for the Australian dollar against the US dollar. Create your live VT Markets account and start trading now.

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