The Australian Dollar slightly increases against the US Dollar and remains stable for a second day, despite low trading volumes due to the New Year holiday in Australia. China’s Manufacturing Purchasing Managers’ Index (PMI) rose to 50.1 in December, surpassing expectations, while the Non-Manufacturing PMI increased to 50.2. This was above what the market had anticipated.
The Australian Dollar gains support due to expectations of potential interest rate hikes by the Reserve Bank of Australia (RBA), with discussions on the matter focusing on conditions for changes in 2026. The RBA has signalled readiness to tighten policy if inflation does not decrease as projected, with attention on the Q4 CPI report scheduled for January 28. Current analysis suggests a strong Q4 core inflation could prompt a rate hike at the meeting on February 3.
The US Dollar Stands Steady
Meanwhile, the US Dollar Index shows stability after recent gains, with the Federal Open Market Committee (FOMC) indicating a likelihood of holding rates steady if inflation decreases. The FedWatch tool shows an 85.1% chance of maintaining current rates at the upcoming Fed meeting. Recent US job market statistics show varying trends, with initial jobless claims decreasing and continuing claims increasing.
The AUD/USD pair trades at around 0.6690 and remains in an ascending channel pattern. Technical analysis indicates a bullish trend, with the pair testing resistance at 0.6700, and potentially moving towards 0.6850. Support is noted at the nine-day EMA of 0.6684, with a possible downside to 0.6414.
The Australian Dollar shows varied performance against major currencies, particularly strong against the New Zealand Dollar. The NBS Manufacturing PMI, an important economic indicator for China, rose to 50.1 in December, reflecting an expanding manufacturing economy.
China’s NBS Manufacturing PMI is a key predictor of economic trends, influencing financial markets globally due to China’s economic prominence. The data, released monthly, is particularly essential for traders as it provides early insights into the health of China’s manufacturing sector.
End Of Year Reflections
As we close out 2025, the Australian dollar is showing strength, helped by unexpectedly good manufacturing data from China. This suggests better demand for Australian goods heading into the new year. The AUD/USD pair is holding firm even with holiday-thinned trading volumes.
The primary driver for us is the diverging paths of the central banks. We see the Reserve Bank of Australia (RBA) discussing the possibility of rate hikes in 2026, while the US Federal Reserve is pausing its rate-cutting cycle after reducing rates three times earlier in 2025. This policy difference creates a favorable environment for the Australian dollar against the US dollar.
This situation reminds us of late 2023, when a similar rebound in Chinese industrial output helped push iron ore prices above $130 per tonne, directly lifting the Aussie dollar. We are seeing early signs of this again, with iron ore futures on the Singapore Exchange for February 2026 delivery climbing 2.1% in the last week. This indicates the market is already reacting to renewed demand from China.
The critical event on our horizon is the Australian Q4 inflation report, scheduled for January 28. Markets are already pricing in a high probability of an RBA rate hike at its February 3 meeting, so this data will be crucial. We should position ourselves for increased volatility around that date.
Given the bullish technical signals and the RBA’s hawkish tone, we believe buying call options on the AUD/USD is a sensible strategy. We are looking at February expiry dates with strike prices around 0.6750, just above the recent highs. This allows for capitalizing on a strong inflation report that could propel the pair towards the 0.6850 resistance level.
The main risk is a weaker-than-expected inflation number, which would quickly erase expectations for an RBA rate hike. Such a surprise could cause the AUD/USD to break below its support level around 0.6680. Therefore, using defined-risk strategies or placing stop-losses is essential to manage a potential sharp reversal.
