Insights 
VT 
The Australian Dollar saw a partial recovery against the US Dollar after dipping to its lowest since 22 August. This dip was influenced by concerns over a potential US-China trade war, affecting Australian sentiment due to its trade link with China.
Federal Reserve Updates
Currently, the AUD/USD is down 0.38% for the day, hovering around 0.6491, after bouncing back from lows at 0.6440. The US Dollar softened as the Federal Reserve (Fed) adopted a dovish stance amidst rising US-China trade tensions.
Federal Reserve Chair Jerome Powell spoke at a conference, noting the labour market has weakened since July. Yet, inflation remains a concern, presenting downside risks to employment if action is taken too swiftly.
There is a 97% likelihood of a 25 basis point rate cut at the Fed’s October 29-30 meeting. A similar probability exists for a December cut, as some policymakers remain open to further easing for labour market support.
The Reserve Bank of Australia’s September meeting minutes revealed no cash rate change. Inflation, especially in services and housing, could be higher than expected in Q3, with policy decisions remaining cautious and data-driven.
Traders anticipate China’s upcoming CPI and PPI data, while watching for developments in the US-China trade situation and Fed policy changes.
Australian and US Interest Rate Dynamics
We are seeing similar weakness in the Australian dollar now in late 2025, with AUD/USD struggling around 0.6350. Looking back, we remember the concerns over the US-China trade relationship that pushed the pair down to the mid-0.64s. While those trade tensions remain a background issue, the primary driver has shifted to interest rate policy.
It is interesting to recall how markets priced in a 97% chance of a Fed rate cut in October of that year. Today, the situation is completely reversed, with the Fed Funds Rate at 5.50% to combat the persistent inflation that followed that easing cycle. With US core inflation still hovering at 3.5% as of last month’s report, options markets are not pricing in any cuts until at least mid-2026.
The Reserve Bank of Australia’s cautious stance back then, holding its cash rate at 3.60% while noting sticky domestic price pressures, proved to be predictive. Those concerns were realized, forcing the RBA to raise its cash rate to the current 4.85% over the following years. Australian Q3 2025 inflation data confirmed this stickiness, coming in at 4.0%, keeping pressure on the central bank.
For traders in the coming weeks, the interest rate differential between the US and Australia remains a key focus. The higher yield on the US Dollar makes shorting AUD/USD through futures or funding the trade in the spot market an attractive carry strategy. Options traders might consider buying puts on AUD/USD to hedge against any further downside driven by a hawkish Fed.
