The Australian Dollar is steady, currently trading just below a two-month high of 0.6654 reached on Tuesday. This stable position comes after a 3% rise since November’s lows as traders await the US Federal Reserve’s next monetary policy announcement. Market expectations lean towards a 25-basis-point rate cut from the Fed, marking the third consecutive reduction. However, there is a hint of caution among policymakers, suggesting a more restrained approach moving forward. All eyes will be on Chairman Powell’s press conference and the Fed’s “dot-plot” for clues about plans for 2026. US President Donald Trump has criticized Powell’s interest rate decisions, calling for “immediate rate cuts” as a factor for naming the next Fed chair. In contrast, Australia’s central bank has kept interest rates steady. Governor Michelle Bullock mentioned inflationary concerns, implying a possible rate hike by late 2026. Initially, the Australian Dollar rose on the Reserve Bank of Australia’s decision but later dropped due to disappointing inflation data from China, its main trading partner. While annual inflation in China increased in November, monthly inflation decreased, along with a significant drop in producer prices, signaling weak domestic demand. After the Fed’s rate decision, the Federal Open Market Committee (FOMC) statement will affect US Dollar fluctuations and short-term market trends. The Fed’s goal is to manage inflation and ensure employment through interest rate changes, influencing the US Dollar based on capital flows and foreign investments. The Australian Dollar is currently holding steady near 0.6654, just under a two-month peak, as we await the Fed’s decision later today. A 25-basis-point rate cut is already anticipated, so we need to focus on the Fed’s guidance for 2026. The real market impact will come from Chairman Powell’s tone and the new dot-plot projections. There is a notable tension between hopes for two or three additional cuts next year and the Fed’s potential cautious stance. Recent November data shows US inflation at 3.1%, significantly over the 2% target, alongside a strong jobs report adding 199,000 positions, keeping unemployment low at 3.7%. This could lead the Fed to hesitate on rate cuts, which might disappoint those expecting aggressive easing. Meanwhile, the Reserve Bank of Australia is pursuing a different course, keeping rates unchanged this week. Governor Bullock has indicated that rising inflation, with Australia’s own CPI at 4.9% in November 2025, may necessitate a rate increase in the latter half of 2026. This divergence between a cutting Fed and a possible hiking RBA is a bullish signal for the AUD/USD pair. This policy difference recalls the 2009-2011 period when the RBA raised rates while the Fed eased, causing a significant rally in the Australian Dollar. Derivative traders might consider positioning for a long-term strengthening of the AUD against the USD. Using long-dated call options could help capture this upside potential while limiting risks. However, we must stay alert to data from China, as poor domestic demand there could hinder the Australian economy. While recent producer price deflation in China is concerning for Australia’s commodity-driven market, it’s worth noting that Chinese exports grew last month for the first time in six months. This suggests that the situation may not be as dire, but it remains a crucial risk to watch. Given the uncertainty surrounding today’s Fed announcement, short-term volatility is likely. A straddle or strangle options strategy could be a good way to trade the price swing that follows Powell’s press conference, regardless of the direction. Looking beyond today, the underlying fundamentals support a higher AUD/USD, making any dips driven by dovish news a potential buying opportunity.

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