The Australian Dollar (AUD) gained against the US Dollar (USD) after three prior days of losses, amid concerns about the Federal Reserve. A criminal investigation into Fed Chair Jerome Powell focuses on the renovation of the Fed’s Washington headquarters and alleged misinformation to Congress. Meanwhile, Australia’s ANZ Job Advertisements declined 0.5% in December, with household spending rising 1.0% in November.
The Reserve Bank of Australia’s policy outlook remains uncertain due to mixed Consumer Price Index (CPI) data. With the US Dollar Index (DXY) falling to around 98.90, there is a growing belief that the Federal Reserve may hold interest rates steady. The US added 50,000 jobs in December, with nonfarm payrolls missing expectations and unemployment dropping to 4.4%. Moreover, US Average Hourly Earnings increased to 3.8% on a yearly basis.
The Australian Dollar Rebound
The Australian Dollar rebounded toward 0.6700, amidst a cautious market trend. The AUD/USD pair showed bullish potential within its ascending channel. In November, Australia’s Trade Surplus narrowed significantly, while both imports and exports exhibited modest changes. Factors such as interest rates, the Chinese economy, and the price of Iron Ore are key drivers of the Australian Dollar’s performance.
The criminal investigation into the Fed Chair is the most critical factor for us right now, creating significant uncertainty around the US Dollar. This kind of political pressure on the central bank is rare and undermines confidence in US monetary policy. We are already seeing one-month implied volatility on major USD pairs, such as the AUD/USD, jump to over 11.5% as traders price in this new risk.
Looking back at the December 2025 data, the miss on Nonfarm Payrolls and the gradual rise in continuing jobless claims were already pointing to a cooling US labor market. This supports the market consensus, with Fed Funds futures showing a 95% probability that the Fed will hold rates steady later this month. The Treasury Secretary’s public call for rate cuts last week only adds to this dovish sentiment.
In Australia, the Reserve Bank appears to be in a holding pattern, with officials stating that rate cuts are not imminent. The upcoming quarterly CPI report is now the key domestic event that could shift this outlook. For now, resilient iron ore prices holding steady around $135 per tonne are providing a solid floor of support for the Aussie dollar.
Future Market Expectations
Given the US Dollar’s sudden weakness, we see the path of least resistance for AUD/USD as higher in the coming weeks. A sustained break above the 0.6700 level would confirm this bullish bias, opening the door to test resistance near 0.6766. We believe buying call options is a prudent way to express this view, as it defines our risk if the Fed situation resolves unexpectedly.
The heightened uncertainty means we should prepare for wider price swings in either direction. This environment makes long volatility strategies, such as buying straddles on the AUD/USD, attractive ahead of the Australian CPI release. Such a position would profit from a large price move, regardless of the direction, which is ideal given the current unpredictability.
