The Australian Dollar is recovering slightly against the US Dollar after falling to its lowest level since August 22. This decline was driven by fears of a potential US-China trade war, which impacts Australia because of its strong trade ties with China.

Federal Reserve Updates

Today, the AUD/USD is down by 0.38%, sitting around 0.6491 after bouncing back from a low of 0.6440. The US Dollar has weakened since the Federal Reserve (Fed) took a softer stance amidst rising US-China trade tensions. Federal Reserve Chair Jerome Powell spoke at a conference and mentioned that the labor market has weakened since July. However, inflation is still a concern, posing risks to employment if actions are taken too quickly. There is a 97% chance of a 25 basis point rate cut at the Fed’s meeting on October 29-30. A similar likelihood exists for a December cut, as some policymakers are considering further easing to support the labor market. The minutes from the Reserve Bank of Australia’s September meeting showed that they have kept the cash rate unchanged. Inflation, particularly in services and housing, might be higher than anticipated in Q3, leading to cautious, data-driven policy decisions. Traders are looking forward to China’s upcoming CPI and PPI data while monitoring the US-China trade situation and changes in Fed policy.

Australian and US Interest Rate Dynamics

In late 2025, the Australian dollar is facing similar challenges, with AUD/USD struggling around 0.6350. We recall the worries about the US-China trade relationship that pushed the exchange rate down to the mid-0.64s. While those trade tensions still exist, interest rate policy has become the main focus now. Back then, markets estimated a 97% chance of a Fed rate cut in October. Today, the scenario has flipped, with the Fed Funds Rate at 5.50% due to ongoing inflation concerns that followed that easing cycle. US core inflation was still around 3.5% in last month’s report, and options markets do not expect any rate cuts until at least mid-2026. The Reserve Bank of Australia was cautious at that time, keeping its cash rate at 3.60% due to persistent domestic price pressures. These concerns came to fruition, leading the RBA to raise its cash rate to the current 4.85% in the following years. Australian Q3 2025 inflation data confirmed this stickiness, landing at 4.0%, maintaining pressure on the central bank. For traders in the upcoming weeks, the interest rate gap between the US and Australia is a key consideration. The higher yield on the US Dollar makes shorting AUD/USD through futures or in the spot market an appealing carry strategy. Options traders may want to consider buying puts on AUD/USD to protect against further declines driven by a hawkish Fed. Create your live VT Markets account and start trading now.

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