US Federal Reserve’s Upcoming Announcement
The Australian Dollar remains steady, trading below a two-month high of 0.6654, achieved on Tuesday. This follows a 3% rise from November’s lows as traders await the US Federal Reserve’s upcoming monetary policy announcement.
The market anticipates a 25-basis-point rate cut from the Fed, marking the third consecutive cut, although a more cautious future policy stance is likely due to differing views among policymakers. Attention will be on Chairman Powell’s press conference and the Fed’s “dot-plot” projections for insights into 2026 monetary plans.
US President Donald Trump criticised Powell’s interest rate decisions, emphasising support for “immediately slashing rates” as a potential election condition for the next Fed chair. Meanwhile, Australia’s central bank kept rates steady, with Governor Michelle Bullock noting inflationary pressures, pointing towards a possible rate increase by late 2026.
The Australian Dollar initially gained on this decision but receded due to weak inflation data from China, Australia’s main trading partner. Although yearly inflation rose in November, monthly inflation fell and producer prices saw deeper deflation, reflecting weak domestic demand in China.
Following the Fed’s rate decision, the Federal Open Market Committee (FOMC) statement influences US Dollar volatility and short-term trends. The Fed aims to control inflation and ensure employment through interest rate adjustments, impacting the US Dollar based on capital flows and foreign investment returns.
Divergent Policies and Future Implications
We are currently seeing the Australian Dollar holding steady near 0.6654, just below a two-month high, as we await the Federal Reserve’s decision later today. A 25-basis-point rate cut is already priced into the market, so our focus must be on the Fed’s forward guidance for 2026. The real market-moving information will come from Chairman Powell’s tone and the new dot-plot projections.
The key tension is between market hopes for two or three more cuts next year and the possibility of a more cautious, or “hawkish,” Fed stance. Recent data from November 2025 showed US inflation still at 3.1%, well above the 2% target, and a strong jobs report that added 199,000 positions, keeping unemployment low at 3.7%. This gives the Fed reason to resist cutting rates too quickly, potentially disappointing those positioned for aggressive easing.
Meanwhile, the Reserve Bank of Australia is on a completely different path, having left rates unchanged this week. Governor Bullock has signaled that rising inflationary pressures, with Australia’s own CPI hitting 4.9% in November 2025, could force a rate hike in the second half of 2026. This growing divergence between a cutting Fed and a potentially hiking RBA is a powerful bullish signal for the AUD/USD pair.
This policy split reminds us of the 2009-2011 period, when the RBA hiked rates while the Fed was easing, causing the Aussie to rally significantly. Derivative traders should consider positioning for a similar long-term strengthening of the AUD against the USD. Using long-dated call options could allow us to capture this potential upside over the next several months while limiting downside risk.
However, we must watch the data coming from China, as weak domestic demand there could act as a headwind for the Aussie. While recent Chinese producer price deflation is a concern for Australia’s commodity-driven economy, we did see Chinese exports grow last month for the first time in half a year. This suggests the situation may not be as dire as some fear, but it remains a key risk to monitor.
Given the immediate uncertainty around today’s Fed announcement, short-term volatility is almost guaranteed. A straddle or strangle options strategy could be effective to trade the initial price swing following Powell’s press conference, regardless of the direction. Beyond today, the underlying fundamentals favor a higher AUD/USD, making any dovish-driven dips in the pair a potential buying opportunity.
