The Australian Dollar is on a roll, hitting its highest point in over a year, but there's a twist! Despite inflation easing off, the AUD is soaring.
On Wednesday, the AUD/USD pair climbed, extending its winning streak for the fourth day in a row. This surge comes despite Australia's inflation rate dropping in November. Traders are now eagerly awaiting the full fourth-quarter inflation report, due later this month, to see if this trend continues.
But here's where it gets controversial... Analysts are warning that if core inflation rises by 0.9% or more, the Reserve Bank of Australia (RBA) might be forced to tighten its monetary policy at its February meeting.
The Australian Financial Review suggests that the RBA might not be done yet with its tightening cycle. Their poll indicates that inflation is expected to remain stubbornly high over the next year, potentially leading to at least two more rate hikes.
The Australian Bureau of Statistics reported that Australia's Consumer Price Index (CPI) increased by 3.4% year-over-year in November, a slight decrease from October's 3.8%. While this missed market expectations of 3.7%, it still remained above the RBA's target range of 2-3%. This is the lowest inflation rate since August, with housing costs rising at the slowest pace in three months.
Australia's CPI remained unchanged at 0% month-over-month in November, matching October's reading. Meanwhile, the RBA's Trimmed Mean CPI rose by 0.3% month-over-month and 3.2% year-over-year. Building permits also surged, reaching a near four-year high in November 2025, rebounding from a previous decline.
And this is the part most people miss... The US Dollar, on the other hand, is edging lower ahead of the ISM Services PMI release. Traders are keeping a close eye on US economic data, which could influence the Federal Reserve's policy decisions.
The US Dollar Index (DXY) has been modestly declining after its previous session's gains. Traders are awaiting key economic indicators like the ISM Services PMI and JOLTs job openings data. The Nonfarm Payrolls report, due on Friday, is expected to show a decrease in job gains, down from November's figures.
Fed Governor Stephen Miran has called for aggressive interest rate cuts to support economic momentum, while Minneapolis Fed President Neel Kashkari warned of a potential rise in the unemployment rate. Richmond Fed President Tom Barkin emphasized the need for finely tuned interest rate adjustments, citing risks to both employment and inflation objectives.
According to the CME Group's FedWatch tool, there's an 82.8% probability that the Fed will keep rates unchanged at its upcoming January meeting.
But wait, there's more! The geopolitical landscape is also influencing currency movements. The US launched a military strike against Venezuela, with President Donald Trump announcing the capture and removal of Venezuelan President Nicolas Maduro. Maduro has since pleaded not guilty to US charges, setting the stage for a significant legal battle with major geopolitical implications.
Traders are expecting two additional Federal Reserve rate cuts in 2026, and markets are speculating about President Trump's potential nomination of a new Fed chair to replace Jerome Powell, which could shift monetary policy towards lower interest rates.
China's RatingDog Services PMI, released on Monday, declined from November's figure, which could impact the AUD due to the close trading relationship between China and Australia.
The RBA's December Meeting Minutes highlight their readiness to tighten policy if inflation doesn't ease as expected, putting the focus on the upcoming Q4 CPI report. Analysts believe a stronger-than-expected Q4 core inflation reading could trigger a rate hike at the RBA's February meeting.
As of Wednesday, the AUD/USD pair is trading around 0.6750, and technical analysis suggests an upward trend within an ascending channel pattern. However, the 14-day Relative Strength Index (RSI) at 70 indicates overbought conditions.
The AUD/USD pair has reached new highs since October 2024 and is targeting the upper boundary of the ascending channel near 0.6830. Initial support is found at the nine-day Exponential Moving Average (EMA) of 0.6708, followed by the lower ascending channel boundary around 0.6700.
The Australian Dollar's performance today is highlighted in the table below, showing its percentage change against major currencies. The AUD was the strongest against the Canadian Dollar.
A heat map provides a visual representation of the percentage changes of major currencies against each other.
The Consumer Price Index (CPI) is a key economic indicator, measuring the changes in the price of a basket of goods and services acquired by consumers. It is the primary measure of headline inflation, and a high reading is seen as bullish for the Australian Dollar, while a low reading is bearish.
So, what do you think? Will the AUD continue its upward trajectory, or will inflation concerns bring it back down to earth? Feel free to share your thoughts and predictions in the comments!
