The Australian Dollar has strengthened due to improved employment data and the expectation of tighter monetary policy from the Reserve Bank of Australia (RBA). Australia saw an employment increase of 65.2K in December, while the unemployment rate fell to 4.1%.
The US Dollar remains steady following news that President Trump would refrain from imposing tariffs on European nations. The USD is trading around an index level of 98.80, as market participants await GDP and PCE data.
China’s Economic Influence
The People’s Bank of China maintained its Loan Prime Rates unchanged, with the one-year and five-year rates at 3.00% and 3.50%, respectively. Changes in China’s economy can affect the Australian Dollar, given the significant trade relations between the two countries.
China’s industrial production rose 5.2% year-over-year in December, and retail sales grew by 0.9% YoY. Australia’s TD-MI Inflation Gauge indicated a YoY rise to 3.5% in December, up from 3.2%.
The AUD/USD pair is trading around 0.6790 and is testing resistance at 0.6800. The AUD has appreciated against major currencies, particularly the Japanese Yen. Factors influencing the Australian Dollar include RBA interest rate decisions, iron ore prices, and trade balances.
We are seeing the Australian Dollar strengthen based on strong domestic economic signals. The robust employment report from December 2025, which added 65.2K jobs, is reinforcing our view that the Reserve Bank of Australia will remain hawkish. This makes any significant rate cuts in the near term highly unlikely.
Monetary Policy and Inflation
Looking back at the end of 2025, inflation was still persistent, with the quarterly CPI print coming in at 4.1%, well above the RBA’s target. The RBA has held its cash rate steady at 4.35% for several consecutive meetings leading into this year, signaling a clear priority to bring inflation back to its 2-3% band. Therefore, we should anticipate that monetary policy will continue to support the currency for now.
On the other side of the pair, the US Federal Reserve appears to be in a holding pattern until at least mid-year. The latest core PCE inflation data showed a deceleration to 2.9% year-over-year, which while encouraging for the Fed, is not yet at their 2% target. This validates the market pushing back expectations for the first rate cut to the June or July Federal Open Market Committee meetings.
The situation in China presents a mixed bag, which introduces a note of caution for the AUD. While industrial production has been resilient, the weak retail sales figures from December 2025 point to softness in domestic demand. We must also watch iron ore prices, which have recently fallen below $130 per tonne after a strong run, as this could act as a headwind for the Aussie dollar.
Given the AUD/USD pair is approaching the key psychological resistance at 0.6800 and the RSI is nearing overbought territory, an outright long position carries risk. Traders could consider buying call options to capture further upside while limiting downside exposure. A bull call spread could also be an effective strategy to reduce the initial cost and capitalize on a measured move toward the 0.6900 level.
With important US GDP and PCE inflation data on the horizon, we can expect a potential spike in volatility. This environment may be suitable for strategies like a long straddle, which would profit from a significant price move in either direction. Such a position would allow traders to benefit from the market’s reaction to the new data, whatever the outcome.
