AUD/USD traded near 0.7150 in early Asian hours on Monday, after pulling back from multi-year highs. Traders awaited China’s Industrial Production and Retail Sales data due later on Monday.
US rate expectations shifted towards possible Federal Reserve hikes after comments from Fed officials on inflation. Markets priced a 48.4% chance of at least a 25 bps hike at the December meeting, up from 14.3% a week earlier, according to CME FedWatch.
Geopolitical tension also affected sentiment as the US and Iran remained apart on a deal to end weeks of war and reopen the Strait of Hormuz. On Sunday, President Donald Trump told Iran to “get moving”, with further consequences implied, and a prolonged conflict could support the US Dollar.
The Australian Dollar is influenced by Reserve Bank of Australia policy, with the RBA aiming for 2–3% inflation using rate changes and, at times, quantitative easing or tightening. The AUD is also linked to China’s economic health and broad market risk appetite.
Iron ore is Australia’s largest export, worth $118 billion a year based on 2021 data, mainly shipped to China. Australia’s trade balance can also affect the AUD, as export surpluses tend to support the currency while deficits can weaken it.
Looking back at the situation in late 2025, we saw a clear divergence between market pricing and the most likely Federal Reserve outcome. With the market pricing in a nearly 50% chance of a rate hike that ultimately did not happen in December 2025, the most apparent strategy was to position for US dollar weakness. This setup suggested that buying call options on the AUD/USD was a sensible way to capitalize on a potential relief rally.
The fundamental drivers for the Australian dollar were also stronger than the sentiment suggested at the time. The Chinese industrial production and retail sales figures for October 2025, released shortly after that period, actually beat expectations, with industrial output rising a solid 4.6% year-over-year. This, coupled with iron ore prices remaining robustly above $130 a tonne throughout that quarter, provided a strong underlying bid for the Aussie dollar.
Therefore, the geopolitical noise from the Middle East presented an opportunity, as it temporarily suppressed the AUD/USD pair while its core supports were strengthening. The tension acted as a headwind, but the combination of a less-hawkish-than-expected Fed and solid demand from China proved to be the more dominant force. We saw this play out as the pair rallied through the end of 2025 and into early 2026, breaking well above the 0.7200 level.
For traders, the correct response was to look past the temporary geopolitical risks and fade the aggressive Fed hike pricing. Selling out-of-the-money AUD/USD put options would have been a viable strategy to collect premium, betting that the strong fundamental floor from commodity prices and Chinese data would prevent a significant downturn. Alternatively, a simple long position through AUD futures or call spreads would have performed well as the market repriced the Fed’s actual path.
