The Australian Dollar is stable as ongoing inflation lowers hopes for quick interest rate cuts by the Reserve Bank of Australia (RBA). A larger-than-expected rise in private sector credit, which grew by 0.7% in October, indicates that the RBA may remain cautious as annual growth hits 7.3%. Meanwhile, the US Dollar is under pressure as markets speculate on more Federal Reserve rate cuts in the coming years. AUD/USD trades around 0.6535, staying mostly the same, influenced by Australia’s strong economic growth, persistent inflation, and rising expectations of US monetary easing.

Inflation in Australia

Inflation in Australia is above the RBA’s target, increasing the likelihood of another rate hike. However, the Official Cash Rate is expected to stay at 3.6% in December. The job market is stabilizing but remains strong, which keeps inflation pressures ongoing. Market expectations are that the RBA will take a careful approach due to strong domestic demand. The US Dollar is uncertain as traders are looking forward to three more rate cuts by 2026, following reports about changes in the Federal Reserve’s leadership. The Australian Dollar is gaining against the Euro but remains stable against other major currencies. Both the Australian and US economies are facing challenges from inflation and differing monetary policies.

Monetary Policy Divergence

With different strategies from central banks, we should explore options to benefit from a rising AUD/USD. The RBA is focused on inflation, while the Federal Reserve is likely to cut rates soon. This difference in policy is a positive factor for the Australian Dollar compared to the US Dollar. Australian inflation remains a crucial support for the Aussie. The recent Q3 2025 Consumer Price Index data showed a 3.8% year-over-year increase, remaining above the RBA’s target. This ongoing high inflation, coupled with solid private credit data, raises the chance of another RBA rate hike in early 2026, even if they hold rates steady in December. On the other hand, the US Dollar is feeling pressure due to expected rate cuts. The latest US Non-Farm Payrolls report for October 2025 was weaker than expected, with only 95,000 jobs added, leading to speculation that the Fed will take action to help a slowing economy. The CME FedWatch Tool now shows a higher than 70% probability of a rate cut at the December FOMC meeting. In this context, we should consider buying AUD/USD call options or setting up bull call spreads. This strategy allows us to profit from a potential upward move while managing our risk, which is wise given that the pair is currently around 0.6535. These positions would profit if the RBA stays hawkish and the Fed confirms a dovish stance. Looking back at 2023, we saw a similar situation where the RBA paused rate hikes before the Fed, resulting in AUD/USD weakness. Now, it looks like the Fed’s easing is ahead of any RBA action, suggesting potential strength for the Aussie. Currently, the pair’s stability indicates low implied volatility, providing a good chance to enter these positions at a fair cost before upcoming central bank meetings. Create your live VT Markets account and start trading now.

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