The AUD/USD stabilizes around 0.6640 following a four-day rally to two-month highs. This pause results from cautious markets ahead of the Reserve Bank of Australia’s decision on Tuesday and the Federal Reserve’s announcement on Wednesday.
The Australian Dollar remains strong as market expectations have shifted, with traders no longer expecting further rate cuts from the RBA. The Consumer Price Index increased by 3.2% year-over-year in the third quarter, up from 2.1% in the second quarter, demonstrating persistent inflation.
RBA Policy Expectations
The RBA is expected to keep its policy rate at 3.6%, with potential guidance on future monetary policy as the critical driver. Some predict a rate hike as soon as 2026, supported by strong household spending, which rose 1.3% in October compared to 0.3% in September.
China’s larger-than-expected trade surplus supports the AUD further, boosting demand due to Australia’s reliance on Chinese exports. Meanwhile, the US Dollar is under pressure with an 87% chance of a 25-basis-point rate cut by the Fed. The US Dollar Index is near a five-week low, with Fed officials suggesting a weaker labor market and slower economic growth.
As of today, December 8, 2025, we see a clear divergence forming between Australian and US monetary policy, creating a prime opportunity for currency traders. The Australian dollar is holding strong near two-month highs against the US dollar ahead of central bank meetings this week. This suggests we should position for potential further AUD strength against a weakening USD.
The market has shifted its view on the Reserve Bank of Australia, now believing rate cuts are off the table for the foreseeable future. With recent data from the Australian Bureau of Statistics showing the monthly inflation indicator ticked up to 3.4% in November, the pressure is on the RBA to maintain a firm stance. We should therefore consider strategies that profit from a hawkish RBA, such as buying AUD call options.
Fed Expectations and Strategy
Looking back, we’ve seen the RBA act independently of other central banks before, notably when it became one of the first to hike rates after the 2008 financial crisis. This history suggests the RBA won’t hesitate to forge its own path if domestic inflation remains a concern. This precedent strengthens the case for a stable or stronger Aussie dollar, even if global growth is uncertain.
On the other side of the pair, the US dollar is under pressure as the Federal Reserve is widely expected to cut rates this Wednesday. The latest jobs report for November showed the US economy added only 145,000 jobs, missing forecasts and confirming a cooling labor market. The market is pricing in an 87% probability of a rate cut, which should continue to weigh on the dollar.
Given this setup, buying AUD/USD call options with expirations in the next several weeks appears to be a sound strategy. This allows us to capitalize on a potential rise in the currency pair driven by the policy divergence, while capping our potential loss at the premium paid. The main risk is if the RBA sounds surprisingly cautious about the economy, or if the Fed signals fewer rate cuts for 2026 than we currently expect.
Underpinning our view on the Aussie is the continued strength of its largest trading partner, China. The recently reported Chinese trade surplus for November was much larger than expected, driven by a sharp rebound in exports. This positive data provides a fundamental support for Australian exports and, by extension, for the Australian dollar.
