The AUD/USD slipped to 0.6715 after being unable to break past 0.6740 earlier. The US Dollar strengthened on Monday, causing the Aussie to give up its earlier gains.
Market participants are cautious about the US Dollar ahead of key US unemployment figures later this week, which may provide more clarity on the Federal Reserve’s plans. Recent US data showed a contraction in manufacturing activity, the fastest in the past 14 months, according to the ISM Services Purchasing Managers’ Index. December’s ISM Manufacturing PMI dropped to 47.9 from 48.2 in November, despite expectations of a slight rise.
Neel Kashkari’s Comments
Minneapolis Fed President Neel Kashkari’s comments hinted at potential rate cuts due to higher unemployment risks. In Australia, strong consumer inflation figures have solidified expectations that the RBA might raise rates soon. The Australian S&P Global Services PMI and monthly CPI, due Wednesday, are crucial for confirming these market views.
The Services PMI is a key indicator assessing the performance of Australia’s services sector, with anything above 50 signalling expansion. Its release will be watched, as the data can anticipate trends in GDP, employment, and inflation. The next release is scheduled for 6th January 2026.
We are observing a growing divide between the policy outlooks for the US Federal Reserve and the Reserve Bank of Australia. The market is increasingly betting on RBA rate hikes to combat inflation, while simultaneously anticipating Fed rate cuts due to a slowing US economy. This fundamental divergence suggests a potential upward path for AUD/USD in the coming weeks.
Economic Indicators And Strategies
The case for a weaker US dollar is strengthening, especially after the latest ISM Manufacturing PMI showed the fastest contraction in 14 months. This aligns with the broader economic trend we saw in late 2025, where the November jobs report showed a disappointing gain of only 155,000 positions, below expectations. These signs of a cooling economy are what prompted Minneapolis Fed President Kashkari’s recent cautious tone on unemployment.
Conversely, the Australian dollar is being supported by persistent inflation, a key theme we tracked throughout last year. The annual inflation rate for November 2025 surprised us by hitting 4.5%, keeping pressure on the RBA to act. Therefore, the upcoming monthly CPI data is critical, as a high reading would almost certainly cement expectations for a rate hike.
For traders, this high-stakes environment makes options strategies particularly attractive to navigate the expected volatility. Buying AUD/USD call options with February expirations could be a prudent way to position for a potential rally following this week’s data releases. This approach allows for capturing upside potential while strictly defining the maximum risk to the premium paid.
This trade view is underscored by current market pricing, as federal funds futures now indicate a nearly 70% probability of a Fed rate cut by its June meeting. Looking at the pair’s history in 2025, we saw how Australian CPI releases often triggered daily moves exceeding 1%, highlighting the importance of managing risk around these key events. A move above the 0.6740 resistance level could signal the start of a more sustained uptrend.
