The Australian Dollar began the week with upward momentum due to encouraging news about US-China trade discussions. Reports that the US has shelved plans to impose 100% tariffs on Chinese goods add to the optimism. The US Dollar sees pressure from softer inflation data, increasing the likelihood of a Federal Reserve rate cut.

The AUD slipped against the USD after an initial rise, driven by hopes for a US-China trade resolution. Upcoming Australian inflation data is expected to influence the Reserve Bank of Australia’s policy decisions. Discussions between US and Chinese officials have led to breakthroughs on major issues, laying the groundwork for an upcoming meeting between President Trump and President Xi Jinping.

Us Dollar Index and Federal Reserve Rates

The US Dollar Index remained steady, hovering around 98.90, influenced by expectations of a Federal Reserve rate cut following disappointing CPI figures. The US CPI rose 3.0% year-over-year in September, underperforming market expectations. The likelihood of an October Federal Reserve rate cut rose to 97%, fueling market speculation about future economic policy.

Technical analysis indicates AUD/USD is trading around 0.6530, with resistance at 0.6550. The potential for breaking this resistance could drive the pair towards the 12-month high of 0.6707. Conversely, a drop might lead the AUD/USD towards its four-month low near 0.6414.

We are seeing the Australian dollar caught between positive global news and weak local fundamentals. Hopes for a US-China trade deal are providing a significant tailwind, especially with threats of major tariffs now off the table. Recent data from China’s General Administration of Customs showed a 5% uptick in Australian iron ore imports for the third quarter of 2025, which supports this positive sentiment.

The US dollar’s weakness is another key factor helping the Aussie. After the aggressive rate hikes we saw back in 2022 and 2023 to curb inflation, the Federal Reserve is now clearly pivoting. Markets are pricing in a near-certainty of a Fed rate cut, which should keep the US dollar subdued in the coming weeks.

Domestic Economic Challenges in Australia

However, Australia’s domestic economy is flashing warning signs that we cannot ignore. The RBA is in a tough spot, as recent data from the Australian Bureau of Statistics showed Q3 GDP growth at a sluggish 1.5% annually. With manufacturing contracting and unemployment rising, the expectation for an RBA rate cut is high and could cap any major gains for the AUD.

For derivative traders, this conflict between opposing forces suggests a rise in volatility. Implied volatility on one-month AUD/USD options has climbed to over 12%, reflecting the market’s uncertainty ahead of key central bank meetings. This environment could be favorable for strategies like straddles, which profit from a large price move in either direction.

The key technical battleground is the 0.6550 resistance level, which has held firm. A decisive break above this point could trigger a sharp move higher, making call options attractive. Conversely, if this level holds, the pair could quickly fall back toward the 0.6400 support, a scenario where put options would be profitable.

We also note the Australian dollar’s strength against the Japanese Yen. Given Japan’s own fiscal worries, a long AUD/JPY position could be a cleaner way to express a bullish view on the trade deal news. This avoids the headwinds from a potential RBA rate cut versus the US dollar.

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