AUD/USD stabilizes as RBA outlook shifts, Fed decision approaches

AUD/USD trades steadily around 0.6640 at the time of writing on Monday, after a four-day rally that pushed the pair to two-month highs. The consolidation comes as investors turn cautious ahead of Tuesday’s Reserve Bank of Australia (RBA) decision and Wednesday’s Federal Reserve (Fed) announcement.

The Australian Dollar (AUD) maintains a bullish tone, supported by a sharp shift in market expectations. Traders no longer anticipate additional rate cuts from the RBA. Instead, the bank may signal that it is done easing monetary policy for now, given persistent inflation pressures. In the third quarter, the Consumer Price Index (CPI) increased 3.2% YoY, up from 2.1% in the second quarter, confirming that inflation remains sticky.

Expectations are firmly aligned with the RBA keeping its policy rate unchanged at 3.6%, but the key driver for the Aussie will be the monetary policy guidance. Markets no longer foresee a reduction in the Official Cash Rate (OCR) in the near term, and some now anticipate a rate hike as early as 2026, encouraged by strong household spending up 1.3% in October versus 0.3% in September.

However, Commerzbank notes that “despite a higher-than-expected inflation print in November, the RBA is unlikely to signal any imminent rate hikes”, which could disappoint a portion of AUD bulls and hurt the Aussie.

Additional support for the Australian Dollar comes from China. The National Bureau of Statistics of China reported a much larger-than-expected trade surplus for November, rising to $111.68 billion, driven by a sharp rebound in exports (5.7% in Chinese Yuan terms after a 0.8% drop in October). As Australia is heavily dependent on Chinese demand for its exports, these upbeat trade figures reinforce underlying AUD demand.

In the United States (US), the US Dollar (USD) remains under pressure ahead of the Fed decision. Markets assign an 87% chance to a 25-basis-point rate cut, according to the CME FedWatch tool, which would bring the target range to 3.50%-3.75%, as evidence of a cooling labor market continues to accumulate. The US Dollar Index (DXY) trades near a five-week low around 98.90 at the time of writing, reflecting investor caution.

Recent comments from Fed officials, including John Williams, underline weakening labor demand and slower economic growth, reinforcing expectations for further easing. However, a potentially more hawkish tone from Jerome Powell, combined with an unusually divided committee, could limit USD losses if the Fed signals increased caution about the pace of rate cuts in early 2026.