- AUD/USD rises to near 0.6710 in the countdown to FOMC minutes of the December meeting.
- The Fed signaled that it will reduce interest rates only once in 2026.
- Investors expect the RBA to tighten its monetary policy next year.
The AUD/USD pair trades mildly higher to near 0.6710 during the European trading session on Tuesday. The Aussie pair rises as the Australian Dollar (AUD) gains amid expectations that the Reserve Bank of Australia (RBA) will tighten its monetary policy in 2026.
RBA hawkish expectations are backed by de-escalating inflation expectations. In the policy announcement earlier this month, officials indicated they stand ready to tighten policy if inflation fails to ease as expected.
Before the RBA’s next monetary policy announcement in February, investors will focus on November’s Consumer Price Index (CPI) data, which will be released in January.
Meanwhile, the US Dollar (USD) trades flat ahead of the release of Federal Open Market Committee (FOMC) minutes of the December meeting in the late New York session. In the policy meeting, the Federal Reserve (Fed) reduced interest rates by 25 basis points (bps) to 3.50%-3.75% and guided that there will be only one in 2026. In 2025, the Fed reduced borrowing rates three times.
Next year, the major trigger for the US Dollar will be the announcement of Fed Chair Jerome Powell’s replacement. On Monday, United States (US) President Donald Trump stated that he will announce new Fed Chair sometime in January.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
