The Australian Dollar stabilises following reduced expectations of a rate cut by the Reserve Bank of Australia. Remarks by RBA Governor Michele Bullock, citing the labour market as “a little tight,” have influenced this adjustment in expectations.

Currently, markets perceive a 15% likelihood of a rate cut, down from 60%. The AUD/USD rate steadies around 0.6560, having earlier hit a three-week high at 0.6564. Upcoming Australian inflation data could provide further clues on interest rate direction.

Mixed Economic Indicators

Australian economic indicators present a mixed outlook. The Manufacturing Purchasing Managers Index dropped to 49.7, indicating contraction, while the Services PMI rose to 53.1, suggesting expansion. Globally, the Australian Dollar gains from optimism over US-China trade talks, with leaders expected to meet soon.

In the US, the Dollar faces pressure, with markets anticipating a 25-basis-point rate cut by the Federal Reserve. The CME FedWatch tool indicates a 96% probability of another rate cut in December amidst soft inflation and a cooling labour market. Hopes for a US-China trade deal and potential Fed easing buoy risk sentiment, aiding the Australian Dollar despite uncertainties.

Today’s currency percentage changes show the Australian Dollar strongest against the British Pound.

Given the current date of October 28, 2025, we are seeing a clear divergence in central bank policy that presents opportunities. The Reserve Bank of Australia is holding firm, with markets now seeing only a small chance of a rate cut after recent comments. This contrasts sharply with the Federal Reserve, where another rate cut this Wednesday is almost a certainty.

Central Bank Policy Divergence

For the Australian side, the RBA’s stance is propped up by a labor market that is still considered tight, even with the national unemployment rate hovering around 4.1% in recent reports. Governor Bullock’s comments are holding the cash rate at 4.35%, a level we have not seen change for some time, reminding us of the aggressive inflation fight we witnessed back in 2022 and 2023. All eyes are now on this Wednesday’s Australian Consumer Price Index (CPI) data to either confirm this stubborn inflation narrative or force the RBA to reconsider.

On the other side of the pair, the US Dollar is weakening because of expectations for Fed easing. Recent data showed US core inflation moderating to 3.1% and the last Non-Farm Payrolls report coming in below expectations at around 155,000 jobs, justifying the Fed’s dovish pivot. Derivatives markets are not only pricing in this week’s 25-basis-point cut but are also showing a 96% probability of another cut in December.

The broader market mood is also helping the Australian Dollar, which often acts as a proxy for risk appetite. Positive developments in US-China trade talks are significant, especially since China remains Australia’s top trading partner, accounting for roughly 32% of our total exports. A potential deal removes a major headwind for the global economy and directly benefits Australian commodity exporters.

For derivative traders, this sets up a classic scenario ahead of Wednesday’s dual data releases from both countries. The high-impact nature of these events means implied volatility on short-dated AUD/USD options has likely risen as traders position for a potential breakout. Strategies that benefit from a spike in volatility, such as buying straddles or strangles, could be considered to capitalize on a significant price move regardless of the direction.

Therefore, the coming weeks hinge on whether Australian inflation remains sticky enough to support the RBA’s hawkish stance. If the CPI data comes in hot, it will amplify the policy divergence with the Fed, likely pushing AUD/USD higher. Conversely, a soft inflation print would undermine the Aussie’s main pillar of support and could cause a sharp reversal.

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