The Australian Dollar (AUD) has weakened against the US Dollar (USD) following a decline in China’s RatingDog Services PMI, now at 52.0 from November’s 52.1. In contrast, China’s Manufacturing PMI rose to 50.1 in December, from 49.9. Given the close trade ties between China and Australia, these shifts in China’s economic figures can influence the value of the AUD.
The Australian Dollar could find support if the Reserve Bank of Australia (RBA) considers interest rate hikes, with focus on the upcoming Q4 CPI report. A strong core inflation reading could lead to a rate hike at the February 3 meeting. Meanwhile, geopolitical tensions have bolstered the USD, with the US Dollar Index currently around 98.60, following events in Venezuela involving US and Trump administration actions.
Technical Analysis of Aud Usd
In the AUD/USD market, technical analysis shows the pair is near the nine-day EMA of 0.6681. It presents a potential to breach the psychological level of 0.6700. However, a fall below 0.6680 could expose the AUD/USD to recent lows around 0.6414. The 14-day RSI at 59.60 indicates the possibility of further upward momentum.
We are seeing a classic flight to safety, with the US Dollar strengthening significantly due to the developing situation in Venezuela. This geopolitical risk has pushed the VIX index, a key measure of market fear, up by over 30% in the last week to 22.5. Consequently, the AUD/USD is under pressure, testing the critical 0.6680 support level.
Our focus in the coming weeks will be Australia’s Q4 CPI data on January 28, which will be the next major catalyst. After seeing inflation remain stubbornly high through late 2025, a strong reading will almost certainly lock in a rate hike from the RBA on February 3. Swaps markets are now pricing in a 75% probability of a hike, so a miss on inflation could cause a sharp unwinding of these bets.
Impact of Global Economic Policies
While the RBA is leaning toward tightening, we see the US Federal Reserve on a different path, with fed funds futures pricing in two rate cuts for 2026. The upcoming end of Jerome Powell’s term as Fed chair in May adds another layer of dovish uncertainty for the US Dollar. This policy divergence is creating a fundamental tension that will likely play out over the next few months.
We are also watching the mixed economic signals from China, with manufacturing improving but services slowing down. Given that China still accounts for over 30% of Australia’s exports, a relationship we saw tested during the trade disputes of the early 2020s, any slowdown there would act as a major headwind for the Aussie dollar. This complicates the bullish case for the AUD, even with a hawkish RBA.
For derivative traders, the current environment suggests heightened volatility, especially with the AUD/USD testing its ascending channel. One could consider buying short-dated puts to hedge against a breakdown driven by geopolitics. Alternatively, positioning for a significant move after the January 28 CPI report using straddles or strangles could capture the expected volatility, regardless of the direction.
