The AUD/USD pair has corrected to around 0.6620, down from almost a three-month high of 0.6686. This movement is influenced by the US Dollar’s recovery, as expectations grow that the Federal Reserve will hold off on further interest rate reductions after already cutting them by 75 basis points this year.
Currently, the US Dollar Index is trading 0.4% higher at approximately 98.60. Market indicators suggest a 20% chance that the Federal Reserve will cut interest rates by 25 basis points in its January meeting. US Nonfarm Payroll data revealed an unemployment rate of 4.6% in November, the highest since September 2021.
Impacts Of Inflation Statistics
The outlook for the Federal Reserve’s policy will be influenced by the upcoming US Consumer Price Index data for November. In Australia, the Reserve Bank is not expected to change interest rates due to inflation exceeding the target band.
The unemployment rate, which is the percentage of the labour force actively seeking employment, is seen as bearish for the US Dollar when it rises. However, the unemployment rate alone cannot determine market movements without considering the broader employment data.
The Australian dollar’s pullback to 0.6620 is a direct result of US dollar strength, which we see has pushed the DXY index up to 98.60. After the Federal Reserve already cut rates by 75 basis points throughout 2025, the market is now betting the central bank will pause for a while. This current AUD/USD weakness reflects the unwinding of positions that were betting on more aggressive Fed cuts.
The US jobs report from yesterday is a point of contention, showing the unemployment rate unexpectedly rose to 4.6%, a notable increase from the 3.9% rate we saw at the start of 2025. While a weakening labor market is typically bearish for the dollar, the market is currently ignoring this and focusing on the Fed’s tough talk. This creates tension, as Fed Chair Powell’s claim that the “bar is very high” for another cut will be tested if job weakness continues into the new year.
Future Monetary Policy Considerations
All eyes are now on tomorrow’s US Consumer Price Index (CPI) data for November. We’re looking for signs of sticky inflation, with consensus forecasts sitting around a 3.2% year-over-year increase, down slightly from October’s 3.4%. A number coming in higher than expected would validate the Fed’s pause and likely send the AUD/USD lower, while a significant miss to the downside would immediately bring January rate cut probabilities back into play.
Given the binary risk of tomorrow’s inflation print, we see traders positioning through options to manage volatility. Buying puts on the AUD/USD offers a direct way to profit from a surprisingly strong CPI number that would boost the US dollar. Implied volatility is elevated, meaning options are more expensive, but it may be a necessary cost to navigate the upcoming data release.
On the other side of the pair, the Reserve Bank of Australia gives us little reason to expect Aussie dollar weakness on its own. With the RBA holding its cash rate steady at 4.35% for over a year to combat inflation that remains above its target, the policy divergence with the Fed is clear. This underlying support is why the AUD/USD managed to reach its recent highs near 0.6686 in the first place.
Looking ahead, we must consider if the Fed’s current pause is sustainable if the labor market continues to soften as it has over the past several months. We’ve seen this pattern before, such as in 2006 when the Fed paused its hiking cycle only to be forced into aggressive cuts as the economy weakened significantly into 2007. A similar scenario could unfold in 2026 if inflation falls faster than expected while unemployment continues to climb.
