The AUD/USD pair has dropped by 0.3% to around 0.6500 during Friday’s trading in Europe, as the US Dollar strengthens. This change comes amid uncertainty about whether the Federal Reserve will cut interest rates in December, while the Reserve Bank of Australia plans to keep its rates steady for the year. Currently, the US Dollar Index, which measures the dollar against six major currencies, has climbed to nearly 99.40. The chances of the Fed lowering rates by 25 basis points in December have decreased from 63% to 50.7%.

Factors Affecting the Australian Dollar

The Australian Dollar (AUD) is under pressure despite a generally positive outlook. Strong employment data and a higher-than-expected Consumer Price Index for Q3 are favorable signs. However, changes in interest rates from the Reserve Bank of Australia and demand fluctuations from China, its biggest trading partner, heavily impact the AUD. Iron ore, Australia’s biggest export, plays a crucial role in the AUD’s value. A favorable Trade Balance—where the country earns more from exports than it spends on imports—can boost the AUD. Also, the economic health of China affects demand for Australian exports and consequently influences the AUD’s value. The US Dollar’s rise is driven by doubts about a potential Federal Reserve rate cut in December. The possibility of a cut has dipped to just over 50%, reflecting recent comments from Fed officials that suggest a tougher stance. This scenario is the main reason why the AUD/USD pair is trending down toward 0.6500. The Fed’s hesitance is warranted, as the latest US Consumer Price Index for October 2025 was at 3.1% year-over-year. Although this is a significant drop from the highs in 2022 and 2023, it remains above the Fed’s 2% target. This ongoing inflation supports the decision to keep rates steady through year-end.

Policy Differences Between the US and Australia

In contrast, the Reserve Bank of Australia has no pressing need to cut rates. The latest data shows Australia’s unemployment rate holding steady at a low 3.9% in October 2025, indicating a tight labor market. Coupled with unexpectedly high inflation in Q3, this strengthens the view that the RBA will stick to its current policy. These differing policies create uncertainty that could lead to increased volatility for AUD/USD as we approach the December Fed meeting. This is reflected in the Cboe Volatility Index (VIX), which is stable around 14, suggesting a cautious market atmosphere. Traders may look to strategies like straddles or strangles to benefit from significant price movements, without betting on a specific outcome. Considering the supporting factors for the AUD, the outlook is mixed, which might limit its decline. China’s latest Caixin Manufacturing PMI rose to 50.7, indicating slight growth in the manufacturing sector of Australia’s key trading partner. Iron ore prices are also resilient, trading near $130 per tonne, which supports the Australian currency. Given the stronger momentum of the US Dollar, traders might adopt bearish positions on AUD/USD in the short run. Buying put options with a strike price below 0.6500 could be a useful strategy to profit from further declines if the Fed maintains its tough stance. This approach offers controlled risk in case supportive factors for the AUD, like commodity prices, lead to an unexpected rebound. Create your live VT Markets account and start trading now.

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