The Australian Dollar (AUD) gained ground against the US Dollar (USD) on Monday after the People’s Bank of China (PBOC) left its Loan Prime Rates unchanged. The one- and five-year rates remained at 3.00% and 3.50%, respectively.
The US Dollar Index, measuring the USD against six key currencies, fell to around 98.60. Traders are awaiting the US Gross Domestic Product figures for the third quarter, due on Tuesday.
Federal Reserve’s Current Position
Federal Reserve’s Hammack noted that the current policy is positioned to pause and assess the impact of previous rate cuts. The University of Michigan revised its Consumer Sentiment Index to 52.9 for December, down from 53.3, while one-year Inflation Expectations rose to 4.2%.
The CME FedWatch tool suggests a 79.0% chance of the Fed holding rates steady in January, with a reduced 21.0% probability for a 25-basis-point rate cut. The US Consumer Price Index for November dropped to 2.7%, lower than the expected 3.1%.
The AUD/USD pair traded around 0.6620, hovering near the lower boundary of an ascending channel, indicating a bullish trend. The nine-day Exponential Moving Average suggests a modest uptrend, though further momentum relies on market movements. The next key levels for the pair are around 0.6685 and 0.6707, while support is seen near 0.6414 if downward pressure persists.
The Australian Dollar is showing strength against the US Dollar, and we see this trend continuing in the short term. The key driver is the difference in central bank policy, with our Reserve Bank of Australia sounding more willing to raise rates than the US Federal Reserve. With iron ore prices holding firm above $135 a tonne on the Singapore Exchange, supported by hopes of Chinese stimulus, the fundamental picture for the Aussie dollar looks positive.
Economic Data and Market Implications
The decision by China’s central bank to hold rates steady provides temporary support, but we must remain cautious. Recent data, much like we saw through parts of 2024, shows China’s manufacturing PMI struggling below the 50-point mark, indicating contraction and a fragile economic recovery. Any further signs of weakness from China could quickly reverse the Aussie dollar’s gains, making this a significant risk to watch.
In the United States, the Federal Reserve appears to be on pause after cutting rates by 75 basis points earlier in 2025. This pause, combined with softer November inflation figures that came in at 2.7%, is keeping the US Dollar subdued. We will be watching this week’s US GDP figures closely, as a stronger-than-expected number could challenge the idea that the Fed is done and cause a reversal.
The political situation in the US adds another layer of uncertainty that could weaken the dollar. President Trump’s comments about wanting a new Fed Chair who favors much lower interest rates create questions about the central bank’s future independence. This uncertainty makes it difficult to commit to long-term US Dollar strength and may keep traders selling the currency on any rallies.
Given the modest uptrend in AUD/USD, we should consider strategies that take advantage of a potential move toward the 0.6700 level. Buying call options or setting up bull call spreads on the AUD/USD pair could be effective ways to profit from this expected upward move. However, given the risks from China and upcoming US data, purchasing some downside protection with put options is a prudent hedge against a sudden reversal.
Looking back, we saw a similar situation from 2009 to 2011, when a hawkish RBA and a very dovish Fed led to a major rally in the AUD/USD. While history doesn’t repeat exactly, this divergence in policy between the two central banks is a powerful theme. The current market pricing, which suggests a 27% chance of an RBA hike by February against almost no chance of a Fed hike, reinforces this bullish setup for the Aussie dollar.
