The AUD/USD pair initially gained during the European session on Thursday but then stabilised around 0.6590 as the US Dollar (USD) recovered, nearing a two-month high around 99.00. This follows the release of the Federal Open Market Committee (FOMC) minutes which indicated potential interest rate cuts by the end of the year, with the Federal Fund Rate expected to reach 3.6%.

Today, market participants will be attentive to Fed Chair Jerome Powell’s speech at 12:30 GMT for insights into the effects of the ongoing US government shutdown on monetary policy. They will also seek information on labour demand normalisation and its implications on the economic landscape. Preliminary data, namely the Michigan Consumer Sentiment Index and Consumer Inflation expectations for October, will be released on Friday, providing further context to economic conditions.

Australian Dollar Outlook

The Australian Dollar (AUD), meanwhile, is buoyant against other currencies as traders reconsider the likelihood of additional interest rate cuts by the Reserve Bank of Australia (RBA). This stands as consumer inflation in Australia appears persistent, according to the University of Melbourne, with Consumer Inflation Expectations rising to 4.8% in October from 4.7% in September.

Given the tension in the AUD/USD around 0.6590, we see a clear conflict between central bank outlooks. The US Federal Reserve is signaling more rate cuts before the end of 2025, which should weaken the dollar. However, the Reserve Bank of Australia is facing persistent inflation, making further cuts there less likely.

We need to watch Fed Chair Powell’s speech today very closely for clues on the US economy. The recent, brief government shutdown in late September 2025 has created some uncertainty, but the latest jobs report showed a still-solid, though cooling, labor market with 190,000 new jobs and an unemployment rate of 4.1%. With the most recent US Consumer Price Index (CPI) data for September showing inflation is still sticky at 3.8%, Powell may sound more cautious about cutting rates too quickly.

Investment Opportunities

This uncertainty suggests that options strategies protecting against short-term volatility could be wise. For traders, this means considering straddles on currency ETFs or futures tied to the US Dollar Index ahead of any major shifts in tone from the Fed. Any deviation from the expected two rate cuts will cause a significant market reaction.

On the other side of the pair, Australian inflation is proving difficult to tame. The official third-quarter CPI data, released last week, came in at 4.9%, well above the RBA’s target range and fuelling bets that they may have to hold rates firm. This strengthens the Australian dollar’s fundamental case against a US dollar backed by a central bank poised to ease policy.

Looking at the coming weeks, the divergence between the two economies presents an opportunity. We can consider building positions in longer-dated AUD/USD call options, betting that the RBA’s struggle with inflation will ultimately outweigh the Fed’s dovish pivot. This strategy allows us to look past the immediate noise and position for the pair to climb higher into early 2026.

We saw a similar pattern back in late 2023 when the market began pricing in Fed rate cuts for 2024, causing the US dollar to weaken significantly even before the first cut was made. Traders who positioned for that policy divergence early were rewarded. The current setup between the Fed and the RBA is creating a comparable environment for the AUD/USD.

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