The Australian Dollar stayed steady after China’s Manufacturing Purchasing Managers’ Index (PMI) results came out. The index rose to 50.1 in December, up from 49.2, beating both previous results and market expectations. Low trading volumes were due to the New Year holiday in Australia, causing little movement in the AUD/USD pair, which held its position for two sessions in a row. Forecasts suggest the Reserve Bank of Australia (RBA) may raise interest rates if inflation continues. Discussions at the RBA centered on possible rate hikes depending on certain conditions by 2026. Minutes from the December meeting indicated a willingness to tighten policies, relying on the upcoming Q4 CPI report on January 28. Analysts anticipate a rate hike at the RBA’s February meeting if core inflation is significantly high.

US Dollar Index Updates

In the US, the Dollar Index remained around 98.20. Minutes from the FOMC hinted at pausing rate cuts if inflation decreases, with an 85.1% chance of maintaining rates in January. US jobless claims dropped to 214K, which was better than the expected 223K. In October, Australia’s inflation hit 3.8%, above RBA targets. A rate hike in February 2026 is being predicted, with banks estimating an increase to 3.85%. The AUD/USD pair approached 0.6700, keeping a bullish trend, while initial support is around 0.6684. The Australian Dollar performed best against the New Zealand Dollar. Due to holiday trading, the Australian Dollar remains stable, boosted by better-than-expected manufacturing data from China. Iron ore futures on the Dalian Commodity Exchange bounced back to over $140 per tonne in December 2025, a level not seen since Q3. This strength in Australia’s biggest trading partner bolsters the currency as we begin the new year. The main factor for the Aussie dollar in the coming weeks will be domestic inflation and the RBA’s response. With inflation consistently above target throughout 2025, attention turns to the Q4 CPI report due on January 28. A strong outcome could solidify expectations for an RBA rate hike at its first meeting of the year on February 3.

US Federal Reserve Pause

On the flip side, the US Federal Reserve seems to be pausing after three rate cuts in 2025. The latest Non-Farm Payrolls report from early December 2025 showed job growth slowing to 150,000, which supports the cooling labor market that led to those cuts. Currently, the US dollar lacks new support from its central bank, highlighting a clear policy gap with the RBA. Given the positive technical outlook and a hawkish RBA, buying call options on the AUD/USD appears to be a smart move. This strategy allows for potential profits if prices rise toward the October 2024 high of 0.6727, while limiting risk to the premium paid. It’s best to structure these positions to expire after the February 3 RBA meeting to take advantage of any volatility from a rate hike. The most certain upcoming event is the expected spike in volatility around the January 28 inflation data. This is reflected in the implied volatility for AUD/USD options expiring after that date, which has increased to over 10%. A long straddle strategy—buying both a call and a put option—could capture profits from a large price swing in either direction following the data release. We must also keep an eye on risk management. The technical chart shows an important support line around the 0.6680 level. A significant break below this point would indicate the current bullish trend may be failing, suggesting it’s wise to use put options to protect any long positions. Create your live VT Markets account and start trading now.

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