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The Australian Dollar has scaled back earlier gains as traders exercise caution ahead of the Federal Reserve’s policy decision. Stronger-than-anticipated Australian inflation data reduces the likelihood of further rate cuts by the Reserve Bank of Australia.
AUD/USD trades around 0.6600, up 0.30% on the day after peaking at 0.6617, but it remains under 0.6630. Markets await the Federal Reserve’s policy announcement, with a 25-basis-point cut widely expected, bringing the rate to 3.75%-4.00%.
Surprise In Australian Inflation
Australia’s inflation figures have surprised markets, with the CPI rising 1.3% QoQ and 3.2% YoY in Q3. This diminishes expectations for immediate rate cuts by the Reserve Bank of Australia. Forecasters such as Commerzbank and Standard Chartered indicate minimal short-term rate cuts, with expectations that the RBA’s cutting cycle may have concluded.
The performance of the Australian Dollar depends partly on global sentiment towards China and US President Donald Trump’s meeting with Chinese leader Xi Jinping. A trade détente would support risk-sensitive currencies such as the AUD.
Economists in the US forecast a 25-basis-point Fed cut with caution. The AUD/USD pair’s trajectory will likely be influenced by Jerome Powell’s announcement and the outcome of the Trump-Xi meeting.
Looking back at this analysis from the Trump presidency is a useful reminder of how market drivers can shift. In that era, the focus was on an expected Federal Reserve rate cut and a specific Trump-Xi meeting, with AUD/USD pinned below 0.6630. Today, the dynamics have completely changed, and we must adapt our strategies accordingly.
The interest rate environment we see now in late 2025 is fundamentally different from the easing cycle discussed in the text. The Federal Reserve’s key rate is holding firm in a 4.50%-4.75% range, while the Reserve Bank of Australia is also on hold at 4.10%. The debate is no longer about the next cut, but about which central bank will maintain higher rates for a longer period.
Diverging Geopolitical Landscape
Recent inflation data underpins this new reality, with the latest US Consumer Price Index for September 2025 coming in at 3.1% and Australia’s at 3.4%. These persistent, above-target inflation figures justify the cautious stance from both central banks. Consequently, the AUD/USD pair has been trading in a tight range, recently hovering around 0.6750.
For derivative traders, this suggests that selling volatility could be a viable strategy in the coming weeks. With both the Fed and RBA seemingly locked in a holding pattern, major directional breakouts in AUD/USD seem unlikely. We could consider strategies like selling short-dated straddles to capitalize on this expected lack of movement.
The geopolitical landscape has also evolved from the direct trade tariff disputes of the late 2010s. The focus of US-China relations has shifted toward strategic competition in technology and securing supply chains. This creates a more prolonged, low-level uncertainty that tends to suppress risk appetite rather than cause the sharp swings we saw around specific meetings back then.
Given this context, positioning for a future policy pivot using longer-dated options is another approach. If we anticipate that the Australian economy might show signs of weakness before the US, buying medium-term AUD/USD call options for mid-2026 could offer value. This allows us to position for an eventual RBA rate cut cycle with defined risk.
