The Australian Dollar (AUD) has been falling against the US Dollar (USD) for six days, now below 0.6600. It may find temporary support as markets expect a rate hike by the Reserve Bank of Australia (RBA) due to rising inflation, which hit 4.7% in December. Major banks predict that the RBA will tighten monetary policy soon. There’s a 28% chance of a rate hike in February, rising to nearly 41% by March. The value of the AUD is also influenced by Iron Ore prices, inflation rates, and Australia’s economic ties with China. Meanwhile, the US Dollar is stable, with the Dollar Index around 98.40, ahead of the delayed US Consumer Price Index report.

Federal Reserve Interest Rates Approach

The Federal Reserve is taking a cautious approach to interest rates, with a 75.6% chance of keeping rates steady at the January meeting. Recent US economic indicators, like the unemployment rate rising to 4.6% and flat retail sales, suggest a cooling labor market. Influencing factors include mixed economic data from China and a stable unemployment rate of 4.3% in Australia reported in November. Technical analysis of AUD/USD shows it is trading below its nine-day EMA, indicating weak short-term momentum. If it continues to drop, it might reach 0.6500, while resistance around 0.6619 could trigger a rebound. The Aussie dollar is continuing to decrease against the US dollar, marking its sixth straight day of losses below the 0.6600 level. This trend suggests that bearish strategies may be preferred. The break below the ascending channel trend signals weakening momentum. A key factor to monitor is the different outlooks from the central banks, which could lead to major market fluctuations soon. While there’s a 41% chance of an RBA rate hike by March 2026, the CME FedWatch Tool indicates a strong 75.6% likelihood that the US Federal Reserve will keep rates unchanged in January. This difference in policy is creating tension for the currency pair.

China’s Economic Influence

The Fed’s cautious stance is supported by disappointing US economic data that we need to watch closely. The US unemployment rate of 4.6% is the highest since the recovery phase in 2021, reflecting a cooling labor market. Along with flat retail sales last month, this weakens the case for a stronger US dollar in the medium term. A notable risk for those bullish on the AUD is recent poor economic data from China, which is Australia’s largest trading partner. Disappointing figures in retail sales and industrial production indicate a slowdown, affecting demand for Australian exports. This week’s reports show that iron ore prices, a key Australian export, have fallen below $110 per tonne from their recent highs, adding pressure on the AUD. Given these mixed signals, traders might lean towards strategies that benefit from increased volatility instead of clear directional bets. Options strategies like straddles or strangles could work well, with the AUD/USD stuck between strong support around the 0.6500 level and resistance near the three-month high of 0.6685. The implied volatility in AUD/USD options reflects this uncertainty, rising over 5% in the past month as the narratives from the central banks diverged. Create your live VT Markets account and start trading now.

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