The AUD/USD pair has risen near a two-month high of 0.6620. The Australian Dollar outperforms, suggesting the Reserve Bank of Australia (RBA) may tighten monetary policy to address inflation expectations.
Data shows the Australian Dollar (AUD) surged 1.15% against the US Dollar (USD) this week. Canadian Dollar fell by 1.15% against AUD, while the Euro (EUR) dropped by 0.80%.
Australian Household Spending Growth
Australian household spending grew to 1.3% in October from September’s 0.3%, boosting RBA hawkishness. In contrast, the US Dollar is subdued as there’s confidence the Federal Reserve will cut interest rates soon.
On Friday, AUD/USD trades at 0.6622, with technical indicators suggesting continued bullish momentum. Positive trends exhibited by a 20-day Exponential Moving Average slope and a strong 14-day Relative Strength Index reading signal potential further gains.
The US Federal Reserve’s interest rate decision is keenly watched. Probabilities indicate an 87% chance of a rate cut by 25 basis points in December, which could affect the USD. Federal Reserve seeks to keep inflation at 2% and maintain full employment through its monetary policy decisions.
The AUD/USD is showing significant strength, nearing 0.6620 after an eleven-day run. We see this as a result of differing monetary policies between Australia and the United States. This divergence presents a clear opportunity for the coming weeks.
Outlook and Strategy
We believe the Reserve Bank of Australia will remain hawkish, especially with recent data supporting their stance. For instance, Australia’s Q3 2025 inflation report showed core inflation at 3.1%, stubbornly above the RBA’s target range. Governor Bullock’s recent comments about taming inflation expectations only reinforce our view that another rate hike isn’t off the table.
On the other side, we see the US Dollar weakening as the Federal Reserve prepares to cut rates next week. The latest November jobs report showed unemployment ticking up to 4.2%, and recent CPI data has inflation cooling towards 2.5%, giving the Fed ample reason to ease policy. Markets are pricing in an 87% chance of a rate cut, which is a powerful headwind for the dollar.
Given this outlook, we are considering buying AUD/USD call options to capitalize on the expected upward move. A January 2026 call option with a strike price around 0.6700 could offer good leverage if the pair breaks its recent highs. This strategy limits our downside risk to the premium paid, which is prudent ahead of a major central bank decision.
We must, however, remember the lessons from late 2023 and early 2024. Back then, the market also aggressively priced in Fed rate cuts, but a resilient US economy forced the Fed to delay, causing the dollar to rebound sharply. A similar surprise from the Fed next week could quickly unwind this entire AUD/USD rally.
Technically, the pair is in a clear uptrend, holding well above the 20-day moving average at 0.6542. This level should act as our line in the sand; a daily close below it would signal a potential reversal and a reason to exit long positions. Our primary target remains the September high of 0.6660, which we will watch as a key resistance level.
