The Australian Dollar (AUD) has made a modest recovery against the US Dollar (USD), with AUD/USD trading around 0.6942. This follows intraday lows, as traders await the Reserve Bank of Australia’s (RBA) interest rate decision. Markets currently anticipate a 25 basis point increase to 3.85%, with a 70-75% likelihood, influenced by persistent inflation.
Australia’s core inflation has risen to 3.4% year-on-year in the final quarter, exceeding the RBA’s 2-3% target. A tight labour market, indicated by an unemployment rate around 4%, supports the argument for monetary policy tightening. Australia’s TD-MI Inflation Gauge shows a yearly rise to 3.6% in January. Chinese economic data is also noteworthy, as China remains Australia’s largest trading partner.
Us Federal Reserve And Market Reactions
In the US, the USD is bolstered by the nomination of Kevin Warsh as Federal Reserve Chair, seen as an inflation hawk. This has tempered expectations for aggressive rate cuts. Strong US manufacturing data, with the ISM Manufacturing PMI rising to 52.6, has also strengthened the USD. The US Dollar Index is trading near 97.63, though future performance may be affected by a partial US government shutdown, delaying employment data.
With the market already pricing in a high chance of a 25 basis point hike by the Reserve Bank of Australia today, the immediate move in the Aussie dollar may be limited. We believe the real opportunity for traders will be in the RBA’s forward guidance. A surprisingly dovish statement that signals a pause could see the AUD/USD quickly give back its recent gains.
This rate hike expectation was built throughout 2025 as inflation proved difficult to control, with quarterly CPI figures consistently coming in above the RBA’s target band. The labor market has also remained incredibly tight, with Australia’s unemployment rate holding below 4% for much of last year, giving the central bank cover to tighten policy further. For context, the last official data for December 2025 showed unemployment at a resilient 3.9%.
On the other side of the trade, the US Dollar is showing renewed strength, making it risky to be overly bullish on the Aussie. The nomination of an inflation hawk to lead the Fed and a strong manufacturing PMI reading of 52.6 are prompting us to reassess the path for US rates. This suggests that selling AUD/USD rallies could be a viable strategy in the coming weeks.
Us Shutdown And Trading Strategies
However, the partial US government shutdown introduces significant uncertainty that could cap the Greenback’s rise. The confirmed delay of the January jobs report means we are flying blind on a key piece of economic data. This makes aggressive short positions on the AUD/USD less attractive until there is more clarity from Washington.
Given this backdrop, we should consider using options to trade the potential volatility. Buying puts on the AUD/USD could be an effective way to position for a dovish RBA surprise or continued US Dollar strength. Alternatively, a straddle strategy could profit from a large price swing in either direction following today’s announcement, without betting on the outcome itself.
Looking beyond this week, the focus will shift from the RBA to the duration of the US shutdown and the eventual release of delayed economic data. Any signs of a prolonged political stalemate in the US could weaken the dollar and provide a tailwind for the Aussie. Therefore, we must remain nimble and prepared to adjust our positions as the situation evolves.
