The Australian Dollar (AUD) dropped as Australia’s trade surplus increased to AUD 3,373 million in December 2025. Exports rose by 1.0%, while imports decreased by 0.8%, showing mixed trade results. The Reserve Bank of Australia (RBA) raised interest rates by 25 basis points to 3.85% due to solid growth and ongoing inflation. Market analysts expect more rate hikes, with a 40 basis point increase anticipated this year.

China’s Economic Influence

In January, China’s Services PMI climbed to 52.3, surpassing expectations, which is good news for Australia’s trade since China is a key trading partner. Additionally, Australia’s Composite PMI and Services PMI experienced their highest growth in months, indicating economic progress. The US Dollar remained stable as expectations for slower rate cuts by the Federal Reserve took hold. The ADP Employment Change reported a smaller rise than expected, while factory activity showed signs of recovery, suggesting the US economy is resilient. Australia’s RBA Trimmed Mean inflation increased to 3.3% year-over-year, and monthly CPI rose by 1.0% in December, exceeding forecasts. ANZ Job Advertisements reflected a strong monthly gain, signaling renewed hiring activity.

AUD/USD Trading Insights

The AUD/USD pair is trading around 0.7000, with possible gains capped at 0.7094. If it breaks above this level, it may test resistance at 0.7250, while support is at approximately 0.6990. Recent data from late January and early this week show a back-and-forth battle between two confident central banks. The RBA’s latest rate increase to 3.85% and Governor Bullock’s firm stance on inflation support the Australian Dollar. This aggressive position is backed by encouraging domestic data, including the strongest PMI growth in nearly four years. Meanwhile, the US Dollar is stabilizing as Federal Reserve officials moderate expectations for rate cuts. The surprising rise in the US ISM Manufacturing PMI to 52.6 indicates economic strength that the market may be underestimating. This resilience allows the Fed to maintain rates for longer, limiting significant rallies in AUD/USD. We need to closely monitor the 0.7000 level for AUD/USD, which corresponds with the lower boundary of its upward trend channel. Historically, during aggressive rate hikes from the RBA, such as the 400 basis points increase through mid-2023, a strong Fed can often influence price movements. A clear break below this support would suggest the recent upward trend may be at risk. Given the current uncertainty, it makes sense to explore options in the coming weeks. For those confident in the RBA’s hawkish approach, buying call options with a strike price above 0.7100 could provide a way to take advantage of potential gains while keeping risk defined. This strategy would benefit if the pair rebounds from channel support and reaches recent highs again. On the flip side, if the channel support near 0.6990 fails, it may be time to consider buying put options. This would help protect against or profit from a decline towards deeper support levels, like the 50-day average of around 0.6767. The weak US private payroll data from January reveals vulnerabilities in the US labor market that could unravel quickly. These competing narratives suggest that we should brace for increased price fluctuations. Implied volatility for AUD/USD options typically rises above 11% during times of diverging central bank policies, up from an average of about 8%. Utilizing strategies like straddles can help us trade this expected increase in volatility, potentially leading to profits whether the pair rises or falls. Create your live VT Markets account and start trading now.

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