US Economic Data and Australian Inflation
The Australian Dollar is trading steadily against the US Dollar near 0.7000, a level not seen since February 2023, as markets await the Federal Reserve’s interest rate decision. The Fed is anticipated to maintain interest rates between 3.50%–3.75%, continuing from last year’s three 25-basis-point rate cuts.
The US Dollar Index is at 96.25, showing stability after dropping to a four-year low of 95.56. Although no rate changes are expected from the Fed, attention remains on Jerome Powell’s press conference for insights on future monetary policy. The market still expects two potential rate cuts this year.
In the US, data points to cautious patience, with inflation easing slightly and the labour market showing strong resilience. This stance could favour the US Dollar, though any inclination towards easing might support the AUD/USD pair. In Australia, stronger-than-anticipated inflation data has increased expectations of a rate hike by the Reserve Bank of Australia. The Consumer Price Index rose 1.0% in December month-on-month and accelerated to 3.8% annually. Trimmed mean CPI rose 0.2% monthly, and yearly core inflation edged up to 3.3%, both surpassing the RBA’s targeted range of 2-3%.
We are seeing a familiar pattern in the AUD/USD, which is currently testing the 0.7250 level as of January 2026. This is being driven by a clear divergence in economic data, with recent US reports showing core inflation cooling to 2.8% while Australia’s Q4 2025 inflation report showed a stubbornly high 4.1% print. This difference reinforces the market’s view that the Reserve Bank of Australia (RBA) may be forced to tighten policy while the Federal Reserve can afford to remain patient.
This setup echoes what we experienced around this time last year, in January 2025, when the currency pair was hovering near the 0.7000 mark. Back then, a hot Australian inflation reading of 3.8% created a strong case for an RBA hike, while the Fed was on hold after delivering several rate cuts in 2024. That policy divergence provided a significant tailwind for the Aussie through the first half of 2025, a historical lesson we should be mindful of now.
Expected Market Volatility and Trading Strategies
Given the upcoming central bank meetings, an increase in short-term volatility is highly likely. Traders should consider strategies that benefit from a sharp price move, such as buying near-term straddles, which allows for profit whether the pair breaks higher or lower post-announcement. Historically, we have seen 1-month implied volatility in the pair increase by an average of 12-15% in the two weeks preceding back-to-back Fed and RBA meetings with uncertain outcomes.
The underlying trend appears to favor a stronger Australian dollar, primarily due to the potential for widening interest rate differentials. For those with a directional bias, purchasing call options with strike prices around 0.7350 and 0.7400 could provide a capital-efficient way to gain upside exposure with a defined risk. Recent Commitment of Traders reports have shown that leveraged funds have been steadily increasing their net long positions in the AUD, signaling growing conviction in this upward trend.
