The AUD/USD pair is rising toward 0.6690, bouncing back from recent losses during Asian trading hours. This increase is linked to expectations of interest rate hikes by the Reserve Bank of Australia (RBA). A stronger-than-expected core inflation report for Q4 could lead to a rate hike at the RBA’s February meeting. RBA Governor Michele Bullock mentioned that discussions about potential rate hikes are ongoing, with a focus on 2026. The S&P Global Australia Manufacturing PMI remains unchanged from November, sitting at 51.6 for December. There’s a slight growth in output and new orders. Meanwhile, the US Dollar is struggling due to predictions of two Federal Reserve rate cuts in 2026. The market is also eyeing US President Trump’s upcoming choice for a new Fed chair to replace Jerome Powell, which might influence lower interest rates.

FOMC Meeting on Rate Cuts

The FOMC’s December Meeting Minutes showed a preference to avoid further rate cuts if inflation decreases. Some Fed officials, however, suggested keeping rates steady after three cuts made in 2025. The Australian Dollar is affected by RBA interest rates, iron ore prices, and the state of the Chinese economy. A positive Trade Balance also supports the AUD. A major theme is the growing divide between RBA and Fed monetary policies. There are increasing expectations for a rate hike at the RBA’s meeting on February 3, with overnight swaps indicating about a 65% chance. This is a stark contrast to the Fed, which already cut rates three times in 2025 to aid a weakening labor market. All attention should be on Australia’s Q4 CPI report expected on January 28. The core inflation surprised on the upside in Q3 2025, and another strong result will likely push the RBA to take action. Buying AUD/USD call options that expire in February could capitalize on any rise following this data release.

Commodity Prices and US Dollar Pressure

Rising commodity prices provide additional support. Iron ore futures have recently surged past $140 per tonne, a multi-month high, thanks to unexpectedly strong steel demand from China. This bolsters Australia’s trade balance and favors the currency. Conversely, the US Dollar faces pressure. The market expects at least two more rate cuts this year, supported by the possibility of a new, dovish Fed chair being nominated in May. This expectation may prevent significant rallies in the US Dollar for now. Create your live VT Markets account and start trading now.

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