The Australian Dollar has made gains against the US Dollar, bouncing back from earlier losses. Sarah Hunter, Assistant Governor of the Reserve Bank of Australia, noted that the economy is stronger than expected, and inflation may rise above forecasts in the third quarter. Although the market is uncertain due to limited global economic growth, a dip in consumer spending is anticipated for Q3. China’s Consumer Price Index fell by 0.3% in September, slightly lower than expected. The Producer Price Index decreased by 2.3%, in line with forecasts. Ongoing trade tensions between the US and China, fueled by new trade restrictions and fees, pose a risk for the Australian Dollar because of Australia’s trade ties with China.

US Dollar Index Challenges

The US Dollar Index is currently around 98.90, facing pressure after Fed Chair Jerome Powell hinted at a potential interest rate cut. The CME FedWatch Tool suggests a nearly 94% likelihood of a rate reduction this October. Meanwhile, Australia’s Inflation Expectations have risen to 4.8%, raising worries that inflation could surpass expectations for Q3. The AUD/USD is trading close to 0.6500 despite a bearish trend, with technical resistance at the nine-day EMA of 0.6532. If it falls below 0.6450, further declines may follow. Key factors affecting the Australian Dollar include RBA interest rates, China’s economic situation, and Iron Ore prices. A strong trade balance supports the Australian Dollar. With the Federal Reserve leaning towards a more relaxed policy and the Reserve Bank of Australia remaining cautious, there’s potential for the Australian Dollar to gain against the US Dollar. The Fed is indicating a strong chance of an interest rate cut soon, while the RBA is worried about ongoing inflation. The RBA’s cautious approach is backed by recent data showing Australia’s annual inflation holding steady at 3.6% in the September quarter. Additionally, Australia’s job market is tight, with the unemployment rate at around 4.1% as of September 2025, leaving little room for policy easing. These conditions are favorable for the AUD, as Governor Bullock has highlighted ongoing concerns with services inflation.

US Economic Indicators

In contrast, the US economy is showing signs of slowing down, supporting the Fed’s more cautious stance. The latest non-farm payrolls report indicated reduced hiring, and September’s CPI data showed US inflation easing to 3.4% year-over-year. These statistics reinforce Chair Powell’s argument for interest rate cuts to assist the labor market and the overall economy. This differing policy direction suggests that buying call options on the AUD/USD could be a good strategy for a potential upward movement. Options with strike prices targeting the 0.6550 to 0.6600 range, expiring in late November or early December 2025, would allow for profit from a possible rally while limiting risk. However, attention must be paid to risks regarding China, Australia’s largest trading partner. Weak inflation data from China and renewed trade tensions with the US could negatively impact the AUD. A decline in Chinese demand could hurt Australian exports and market sentiment. To mitigate this risk, buying out-of-the-money AUD/USD put options is a wise choice. A strike price around 0.6400, which is below the significant support level from August 21, could protect against a sudden market downturn. This strategy would safeguard our portfolio in case tensions rise or Chinese economic data worsens unexpectedly. Lastly, iron ore prices, a crucial export for Australia, provide support for our outlook. These prices have remained strong, trading above $115 per tonne for the first half of October 2025. This stability reinforces the value of the Australian Dollar and supports the potential for it to break past current resistance levels. Create your live VT Markets account and start trading now.

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