• The Australian Dollar consolidates around 0.6460 despite fragile risk sentiment.
• Rising tensions between China and Japan limit demand for cyclical currencies like the Aussie.
• The US Dollar remains soft as markets price in faster Federal Reserve rate cuts.

AUD/USD trades around 0.6460 on Monday at the time of writing, virtually unchanged on the day as the pair consolidates near last week’s three-month lows. The Australian Dollar (AUD) holds steady but struggles to attract fresh buying interest amid a cautious market backdrop.

Geopolitical concerns continue to weigh on risk appetite. Tensions escalated after Japanese Prime Minister Sanae Takaichi suggested that a Chinese military action against Taiwan could trigger a response from Japan, comments that China’s Foreign Minister Wang Yi described as crossing a “red line.” With China and Japan being Australia’s two largest trading partners, this flare-up keeps investors on the defensive and limits Aussie upside potential.

The stabilizing tone of the AUD contrasts with the broadly supportive domestic backdrop. Preliminary Australian Purchasing Managers Index (PMI) data last week showed Manufacturing activity returning to growth in November, while Services activity accelerated for a second consecutive month, reinforcing the restrictive stance of the Reserve Bank of Australia (RBA). However, these positive signs are overshadowed for now by renewed geopolitical uncertainty in the Asia-Pacific region.

On the US side, the US Dollar (USD) remains under pressure. The impact of stronger S&P Global PMIs and the improvement in the University of Michigan Consumer Sentiment Index was offset by dovish comments from John Williams, President of the Federal Reserve Bank of New York and Vice Chair of the Federal Open Market Committee (FOMC). Williams noted that the central bank has room to lower interest rates without jeopardizing progress on inflation.

According to the CME Group’s FedWatch tool, markets now assign a 75% chance to a 25-basis-point rate cut in December, sharply higher than the 45% priced a week earlier. This shift continues to soften the USD and helps AUD/USD maintain its current consolidation phase.