The Australian Dollar has gained strength thanks to better employment data and expectations of tighter monetary policy from the Reserve Bank of Australia (RBA). In December, Australia added 65.2K jobs, and the unemployment rate dropped to 4.1%. Meanwhile, the US Dollar has remained steady after President Trump decided not to impose tariffs on European countries. The USD is trading at an index level of around 98.80, as traders await GDP and PCE data.

China’s Economic Influence

The People’s Bank of China has kept its Loan Prime Rates unchanged, holding the one-year rate at 3.00% and the five-year rate at 3.50%. Changes in China’s economy can impact the Australian Dollar due to the strong trade links between the two nations. In December, China’s industrial production grew 5.2% compared to last year, while retail sales saw a slight increase of 0.9% year-over-year. In Australia, the TD-MI Inflation Gauge reported a rise to 3.5% YoY in December, up from 3.2%. The AUD/USD pair is trading around 0.6790, testing resistance at 0.6800. The Australian Dollar has improved against major currencies, particularly the Japanese Yen. Factors affecting the Australian Dollar include the RBA’s interest rate decisions, iron ore prices, and trade balances. The Australian Dollar is gaining strength due to strong domestic economic signals. The strong employment report from December 2025, which added 65.2K jobs, reinforces the belief that the RBA will stay hawkish. This means significant rate cuts are unlikely in the near future.

Monetary Policy and Inflation

At the end of 2025, inflation remained high, with the quarterly CPI at 4.1%, well above the RBA’s target. The RBA has kept the cash rate steady at 4.35% for several meetings, showing its commitment to reducing inflation to the 2-3% range. We can expect monetary policy to continue supporting the currency for now. On the US side, the Federal Reserve seems to be in a wait-and-see position until at least mid-year. The latest core PCE inflation data showed a slowdown to 2.9% year-over-year, which is promising for the Fed, but still not at their 2% target. This leads to a delay in expectations for the first rate cut, likely pushing it to the June or July Federal Open Market Committee meetings. The situation in China is mixed, which adds caution for the AUD. While industrial production remains strong, the weak retail sales in December suggest domestic demand is softening. Additionally, iron ore prices have recently dropped below $130 per tonne after a strong period, which could pose challenges for the Aussie Dollar. With the AUD/USD pair nearing the key psychological resistance at 0.6800 and RSI approaching overbought levels, taking an outright long position carries risks. Traders might consider buying call options to capture potential gains while limiting downside risk. A bull call spread could also be a good strategy to lower initial costs while targeting a more measured move toward the 0.6900 level. As important US GDP and PCE inflation data approaches, we can expect potential rises in volatility. This environment may be ideal for strategies like a long straddle, which could profit from significant price movements in either direction. This strategy allows traders to benefit from market reactions to the new data, regardless of the outcome. Create your live VT Markets account and start trading now.

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