The Australian Dollar (AUD) finds it tough to keep up its gains, even after Reserve Bank of Australia Governor Michele Bullock suggested there’s no need for immediate rate cuts. A weaker US Dollar is helping the AUD/USD pair rise, reaching its highest level since mid-September during the Asian session.

Impact of the Federal Reserve Decision

Traders are cautious as they await a decision from the US Federal Reserve, which many expect will lead to a rate cut. This expected cut is hindering the US Dollar’s recovery, indirectly boosting the Australian Dollar. The Reserve Bank of Australia has set its Official Cash Rate at 3.6%, using upcoming data to shape future decisions. Inflation is still above the RBA’s target, preventing any immediate policy easing and hinting at possible tightening in the future. In the US, the Personal Consumption Expenditures Price Index increased by 2.8% over the year, meeting expectations and supporting a dovish outlook for the Federal Reserve. Traders currently see a 90% chance of a Fed rate cut, which is likely to limit the US Dollar’s strength. The AUD/USD pair is supported around 0.6615-0.6620. If it falls below 0.6600, buying could occur near 0.6560-0.6555. Traders are waiting for US employment data, the FOMC decision, and Australian employment figures for more clarity. Looking back to September and October 2025, the market began to anticipate a large policy divide between the Reserve Bank of Australia and the US Federal Reserve. At that time, RBA Governor Bullock hinted at a possible need for tighter policy, surprising many. This led to the Australian dollar gaining strength, as traders started to expect higher interest rates in Australia.

Analysis of the Policy Gap

The expected divergence has largely occurred over the past few months. The Federal Reserve implemented a 25 basis point rate cut in late September but has since remained steady. US labor data for November showed a strong jobs market, adding 195,000 payrolls. In contrast, Australian inflation has stayed stubbornly high, with the latest quarterly CPI data showing a 3.4% annual rate, forcing the RBA to keep a hawkish approach. As a result of this policy gap, the AUD/USD pair has broken through the 0.6700 resistance level, which was a key target in September. It is now settling around 0.6850, reflecting the yield advantage the Australian dollar now holds. This is a direct result of the RBA maintaining its cash rate at 3.60% while US rates have softened. Given this situation, derivative traders may want to prepare for further Australian dollar strength, at least into early 2026. Implied volatility for AUD/USD options is moderate, making strategies like buying call options appealing for potential profit. For example, a call option with a strike price of 0.6950 and a February 2026 expiration would benefit from an upward trend in the pair, driven by the RBA’s next policy meeting. However, it’s important to be aware of the risks, especially regarding a dip in demand from China or unexpected changes in the Fed’s messaging. For those who prefer a more cautious approach, a bull call spread could be a smart choice. This involves buying a call option at a lower strike, like 0.6900, and selling a call at a higher strike, such as 0.7050, to reduce initial costs and clearly define risk. Create your live VT Markets account and start trading now.

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