The Australian Dollar (AUD) grew stronger for the second day in a row as the US Dollar (USD) weakened due to rising tensions over Greenland. This shift helped the AUD/USD pair increase in value, influenced by the People’s Bank of China’s choice to keep its Loan Prime Rates steady. Concerns about US tariffs on European countries also put pressure on the USD and affected market feelings.

US Tariffs And Market Impact

President Trump’s decision to impose tariffs on eight European countries—partly due to their backlash against the US purchasing Greenland—added to market fluctuations. The European Union is ready to respond to these tariffs, which complicates the economic situation. In Australia, the TD-MI Inflation Gauge reported a 3.5% rise in December compared to the previous year. This suggests the Reserve Bank of Australia might think about raising interest rates. At the same time, the job market in the US is strong; jobless claims are down, even with high borrowing costs. In China, Industrial Production increased by 5.2% year-over-year, and GDP grew by 4.5% in Q4 2025, impacting the Australian Dollar due to trade ties. The AUD stayed above the nine-day Exponential Moving Average, signaling continued short-term gains against the USD. The AUD’s performance aligns with global economic signals, notably from key exports like Iron Ore and China’s economy. Currently, the growing frustration between the US and Greenland offers a clear trading opportunity. The USD is losing strength because of this geopolitical uncertainty, while the AUD is gaining ground due to solid domestic inflation figures. This suggests a likely increase in the AUD/USD pair in the near future. We should think about buying call options on the AUD/USD, targeting prices close to the current level, aiming for a rise towards the October 2024 high of 0.6766. This approach allows us to benefit from expected gains in the pair while limiting our risk to the premium we pay. This strategy is particularly useful as a sudden easing of US-EU tensions could reverse the trend sharply.

Volatility And Option Strategies

The recent geopolitical tensions have pushed currency volatility measures higher, similar to the increase we observed in the VIX index during the market unrest of 2024. This situation makes defined-risk option strategies more appealing than standard futures positions. We expect that implied volatility will stay high as long as tariff threats linger. On a fundamental level, the Aussie dollar is also backed by strong commodity prices. Iron ore is currently priced above $135 per tonne, providing a stable base for the currency from previous cycles. With a 22% chance of a rate hike by the Reserve Bank of Australia (RBA) in February already factored in, there’s a strong argument for continued AUD strength. China’s recent economic data presents a mixed but supportive landscape for Australia. Stronger-than-expected industrial production and GDP results indicate solid demand for Australian exports. However, disappointing retail sales underline ongoing domestic consumption issues in China since the peak of the post-pandemic recovery in 2023. The main risk to this outlook is a swift diplomatic breakthrough between the US and the EU, which would lead to a sharp rebound in the USD. Therefore, anyone holding long positions in AUD/USD should set clear profit targets and manage their investments carefully. The key event to watch will be the tariff deadline on February 1st and any official comments leading up to it. Create your live VT Markets account and start trading now.

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