AUD/USD has softened as the US Dollar strengthens after recent US inflation data. The US Consumer Price Index (CPI) rose 0.3% MoM in December, aligning with expectations, while core CPI increased by 0.2% MoM, slightly below forecasts.
Gradual Moderation In Inflation
Annual headline inflation remained at 2.7%, with core inflation at 2.6%, both showing little change. These figures suggest a gradual moderation in inflation, influencing expectations for Federal Reserve rate cuts.
Fed President Alberto Musalem indicated inflation is close to 3% and is expected to decrease as the labour market cools. Australia showed a decline in consumer confidence, offering limited support for the AUD.
Key factors affecting the Australian Dollar include the Reserve Bank of Australia’s interest rates, iron ore prices, and China’s economic health. Higher interest rates generally support the AUD, while China’s economic growth boosts demand for Australian exports.
Iron ore, being a major Australian export, impacts the AUD value. A positive Trade Balance, where exports exceed imports, strengthens the AUD as foreign demand for Australian goods increases. The upcoming US economic releases and Fed officials’ comments will be crucial for further guidance on monetary policy.
Recent AUDUSD Trends
We are seeing a similar story to the one that played out in early 2025, with the AUD/USD pair under pressure. Current US inflation data for December 2025 has come in slightly hotter than expected at 3.2%, keeping the Federal Reserve from signaling any immediate rate cuts. This has pushed the US Dollar higher and sent the Aussie down to around the 0.6550 mark.
The Fed’s cautious stance is being reinforced by a resilient labor market, and futures markets are now only pricing in a 15% chance of a rate cut by March. This is a significant shift from a month ago and suggests the dollar will remain strong in the near term. We expect implied volatility in dollar pairs to remain elevated as traders adjust their rate cut expectations for later in the year.
On the Australian side, things are not providing much support either, as Q4 2025 inflation remained stubbornly high at 4.0%. This puts the Reserve Bank of Australia in a difficult position, unable to consider easing policy while its US counterpart stays firm. This policy divergence is a key factor weighing on the Australian dollar.
Furthermore, iron ore prices, a critical driver for the Aussie, have softened recently, dipping below $120 per tonne due to ongoing concerns about the strength of China’s property sector. The latest mixed PMI data out of China does little to help this sentiment. These external factors add another layer of pressure on the currency.
Given this backdrop, traders should consider strategies that benefit from a declining or range-bound AUD/USD in the coming weeks. Buying put options could offer a direct bearish play with defined risk, while selling out-of-the-money call spreads might be a suitable strategy to collect premium if we expect the pair to grind lower or move sideways. Watch for key support around the 0.6500 level, as a break below could trigger further selling.
