US Economic Data and Australian Inflation

The Australian Dollar is steadily trading against the US Dollar at around 0.7000, a level last seen in February 2023. Traders are waiting for the Federal Reserve’s decision on interest rates. The Fed is expected to keep rates between 3.50% and 3.75%, continuing from three cuts of 25 basis points last year. The US Dollar Index sits at 96.25, stable after falling to a four-year low of 95.56. Although no rate changes are expected, many are watching Jerome Powell’s press conference for hints about future monetary policy. The market still anticipates two possible rate cuts this year. In the US, inflation has eased slightly, and the labor market remains strong, indicating cautious patience. This outlook might support the US Dollar, although a hint of easing may strengthen the AUD/USD pair. In Australia, inflation data was stronger than expected, raising hopes for a rate hike from the Reserve Bank of Australia (RBA). The Consumer Price Index (CPI) increased by 1.0% in December month-on-month and rose to 3.8% year-on-year. Core inflation, measured by the trimmed mean CPI, grew by 0.2% monthly, with annual core inflation reaching 3.3%, exceeding the RBA’s target range of 2-3%. The AUD/USD pair is testing the 0.7250 level as of January 2026. This movement is driven by differing economic data: recent US reports show core inflation cooling to 2.8%, while Australia’s Q4 2025 inflation report revealed a stubbornly high 4.1%. This situation supports the view that the RBA may need to tighten its policy, while the Federal Reserve can remain patient. This scenario resembles January 2025 when the currency pair hovered around 0.7000. At that time, a strong Australian inflation rate of 3.8% bolstered the case for an RBA hike, while the Fed paused after several cuts in 2024. This policy difference provided significant support for the Australian Dollar during the first half of 2025, a trend worth recalling now.

Expected Market Volatility and Trading Strategies

With upcoming central bank meetings, short-term volatility is likely to rise. Traders might explore strategies that benefit from sharp price movements, such as buying near-term straddles. This allows for profit whether the pair moves up or down after the announcements. Historically, we’ve seen a 12-15% increase in one-month implied volatility in the pair during the two weeks before back-to-back Fed and RBA meetings with uncertain outcomes. The overall trend seems to favor a stronger Australian Dollar, mainly due to potential widening interest rate differences. For those with a directional bias, buying call options at strike prices around 0.7350 and 0.7400 might be a cost-effective way to gain upside exposure with defined risk. Recent Commitment of Traders reports indicate that leveraged funds have been increasing their net long positions in the AUD, showing growing confidence in this upward trend. Create your live VT Markets account and start trading now.

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