Australian dollar rebound imminent? Federal Reserve's easing and rising inflation are creating new opportunities

The Real Hidden Meaning Behind the Fed’s Rate Cut: Liquidity Injection Far Exceeds Surface

The Federal Reserve’s December rate cut of 25 basis points was in line with expectations, bringing the federal funds rate to the 3.50%-3.75% range, with a total reduction of 75 basis points for the year. But what the market truly needs to focus on is not the rate cut itself — which has already been priced in — but the Fed’s initiation of the Reserve Management Purchase (RMP) program.

This plan means that within the next 30 days, the Fed will buy $40 billion worth of short-term government bonds. At first glance, it appears similar to quantitative easing (QE), but it actually signals a deeper message: the US banking system is showing signs of fragility. Michael Burry, the real-life figure behind the movie “The Big Short,” bluntly states that the operations of the Fed and the US Treasury are highly coordinated — the Treasury issues short-term bonds, and the central bank buys them immediately — this seemingly “coincidental” coordination actually hints at the financial system’s efforts to prevent potential risks.

The dot plot also conveys another signal: policymakers expect only one more rate cut by 2026, far below the market’s previous bets of two cuts. This suggests that the Fed’s preemptive rate-cut cycle may be over, with future focus shifting to monitoring inflation trends.

Inflation Rebound Risks Emerge, Commodities and Precious Metals Rise

The Fed’s liquidity injections are fermenting in the market. The US dollar is weakening, and precious metals and commodities prices are climbing steadily, with silver particularly striking — soaring to $64.3, up over 120% year-to-date. This is not an isolated phenomenon but a signal of re-priced inflation expectations.

As the world’s largest producer and exporter of iron ore, and also a gold exporter, Australia’s GDP derives over 8% from mining. When export prices rise and surpass import costs, Australia benefits directly. This is the core logic of the Australian dollar as a typical commodity currency — it is driven not only by exchange rate factors but also highly synchronized with commodity cycles.

Divergence in Policy Between the RBA and the Fed: The Upward Momentum of the AUD

Recent Australian employment data show a decrease of 21,300 jobs, with the unemployment rate holding at 4.3%. At first glance, this appears weak, but the recent comments from RBA Governor Michelle Bullock are more noteworthy — the rate hike cycle has ended, and the central bank is assessing whether the inflation rebound requires an extension of the pause or further rate hikes.

November CPI data shows a headline consumer price index (CPI) of 3.8%. The central bank forecasts inflation will only return to the 2-3% target range by mid-2027. This indicates that the RBA’s priority is not employment but inflation control. The market currently expects the RBA to hike at the February meeting next year, with the current benchmark rate at 3.6%.

In contrast to the Fed’s further easing bias, the RBA’s hawkish stance forms a stark contrast. The widening policy interest rate differential typically enhances the attractiveness of high-yield currencies. The interest rate advantage of the Australian dollar relative to the US dollar is re-emerging, providing further upward momentum for AUD/USD.

Global Macro Environment Improves, Trade De-escalation Benefits Risk Assets

The Fed has raised its 2026 GDP growth forecast by 0.5 percentage points to 2.3%, significantly reducing stagflation risks. But it’s important to note that the US fiscal situation is worsening — the national debt has surpassed $30 trillion for the first time, doubling in just seven years.

This involves a key economic triangle: tariffs, fiscal deficits, and inflation cannot be controlled simultaneously. Inflation essentially dilutes debt but also weakens the dollar’s creditworthiness. As inflation expectations rebound and fiscal deficits remain difficult to resolve, substantial progress in US-China trade relations is expected. Easing trade tensions will release upward potential for global risk assets, and Australia, as a country highly dependent on the Chinese economy, will also benefit from this.

Technical Confirmation: AUD/USD Is Poised for a Breakout

Weekly charts show that AUD/USD previously consolidated around 0.6500 and has now broken through 0.6600, showing a strong bottoming pattern. If it can hold above 0.6600 effectively, further rebound toward 0.6900 is possible. The medium-term support/resistance line can be set around 0.6550.

From fundamental to technical analysis, the Australian dollar is entering a multi-faceted favorable window: commodity bull market support, widening central bank policy divergence, and improving global macro environment — all these factors are jointly driving the start of the AUD’s upward cycle.