The Australian Dollar saw a decline as Australia’s trade surplus widened to AUD 3,373M in December 2025. Exports rose by 1.0% while imports fell by 0.8%, showing mixed performance in trade data.
The Reserve Bank of Australia increased interest rates by 25 basis points to 3.85% due to strong growth and persistent inflation. Market forecasts predict further rate hikes, with a 40 bps increase expected within the year.
China’s Economic Influence
China’s Services PMI rose to 52.3 in January, above expectations, benefiting Australia’s trade given China is a major partner. Meanwhile, Australia’s Composite PMI and Services PMI saw their highest growth in several months, indicating economic expansion.
The US Dollar remained stable amid expectations for slower Federal Reserve rate cuts. ADP Employment Change reported a smaller increase than anticipated while factory activity rebounded, indicating ongoing economic resilience in the US.
Australia’s RBA Trimmed Mean inflation increased to 3.3% YoY, and monthly CPI rose 1.0% in December, above forecasts. ANZ Job Advertisements saw a strong monthly gain, marking renewed hiring momentum.
AUD/USD Trading Insights
The AUD/USD pair is trading around 0.7000, with potential gains capped at 0.7094. A break above may test resistance at 0.7250, while support stands around 0.6990.
Based on the data from late January and early this week, we are seeing a classic tug-of-war between two increasingly confident central banks. The Reserve Bank of Australia’s recent rate hike to 3.85% and Governor Bullock’s stern warning on inflation provide a strong tailwind for the Australian dollar. This hawkish stance is supported by robust domestic data, including the strongest PMI expansion in nearly four years.
On the other side, the US Dollar is finding its footing as Federal Reserve officials temper expectations for rate cuts. The unexpected rebound in the US ISM Manufacturing PMI to 52.6 shows the economy has a resilience that the market may be underestimating. This strength gives the Fed room to hold rates higher for longer, putting a cap on any significant AUD/USD rally.
We must pay close attention to the 0.7000 level for AUD/USD, which aligns with the lower boundary of its ascending channel. History shows that even during aggressive RBA hiking cycles, like the one that added 400 basis points through mid-2023, a determined Fed can often dominate price action. A decisive break below this support would signal that the recent uptrend is in jeopardy.
Given this uncertainty, using options to express a view seems prudent in the coming weeks. For those who believe the RBA’s hawkishness will prevail, buying call options with a strike price above 0.7100 offers a way to capture potential upside with a defined risk. This strategy would benefit if the pair successfully bounces off the channel support and re-tests its recent highs.
Conversely, if the channel support near 0.6990 breaks, it would be a trigger to consider buying put options. This would protect against or profit from a slide toward deeper support levels like the 50-day average near 0.6767. The weak US private payrolls data from January shows there are still cracks in the US labor market that could unravel quickly.
The competing narratives suggest we should prepare for an increase in price swings. Implied volatility for AUD/USD options often rises above 11% during periods of central bank policy divergence, up from a typical average of around 8%. We can use strategies like straddles to trade this expected rise in volatility itself, which could be profitable regardless of whether the pair breaks higher or lower.
