The Australian Dollar dipped slightly after two days of gains, even though Westpac’s Leading Economic Index rose by 0.1% in December 2025. The economic recovery seems to be extending into early 2026, with the six-month annual growth rate rising to 0.42%. Despite concerns between the US and Greenland, the US Dollar recovered its losses. The US Dollar Index was around 98.60 as the US plans new tariffs on some EU countries amid tensions with Greenland. The Federal Reserve may wait to cut rates until there is clear evidence that inflation reaches the 2% target.

China’s Economic Influence

China’s economy is on the rise, with a 5.2% increase in Industrial Production year-over-year for December. Australia’s TD-MI Inflation Gauge also went up to 3.5% in December, indicating the possibility of future monetary tightening. The Reserve Bank of Australia (RBA) expects just one more rate cut this year, and inflation is likely to remain above 3% in the short term. The AUD/USD pair is trading around 0.6740, showing a positive outlook for the short term and aiming for a 15-month high of 0.6766. The Australian Dollar is weaker against the New Zealand Dollar, as illustrated in the currency percentage change heatmap. Tariffs impact international trade, sparking varied opinions on their advantages and disadvantages. The Australian Dollar is maintaining a position near a 15-month high against the US Dollar, setting up for bullish movement in the coming weeks. This is largely due to persistent inflation in Australia, which supports the RBA’s decision to keep a tight monetary policy. Buying AUD/USD call options could be a strategy for those looking to benefit from a potential breakout above recent highs.

Inflation and Interest Rates

Recent inflation data from the Australian Bureau of Statistics revealed that the Q4 2025 Consumer Price Index rose 3.6% year-over-year, higher than expected. Throughout 2025, inflation remained stubbornly above the RBA’s target band, making further rate cuts unlikely and keeping the door open for a possible hike, which bolsters the Aussie dollar. Conversely, the US Dollar faces challenges from new geopolitical uncertainties. President Trump’s tariff threats against the European Union related to Greenland are leading to concerns about slower global growth, which is putting pressure on the dollar. We witnessed similar USD weakness during the peak of the US-China trade tensions in 2018 and 2019, indicating that tariff discussions could lead to dollar volatility again. The Australian Dollar benefits from a stable economic environment in China, Australia’s largest trading partner. Recent Chinese data showed strong industrial production and better-than-expected GDP growth, boosting demand for Australian exports like iron ore. Currently, iron ore futures are trading near multi-year highs of over ¥950 per tonne, enhancing Australia’s terms of trade. Technically, the AUD/USD pair is trading above key short-term moving averages, and the Relative Strength Index indicates there is room to climb before becoming overbought. A sustained move above the 0.6766 level would signal a significant bullish breakout. Setting strike prices for call options above this key resistance point could help capture the expected upward momentum. Create your live VT Markets account and start trading now.

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