AUD/USD poised for breakout as inflation expectations drive commodity currencies higher

Federal Reserve liquidity support and opportunities for the Australian dollar

In the latest December interest rate decision, the Federal Reserve cut rates by 25 basis points to a range of 3.50%-3.75%, bringing the total cut for the year to 75 basis points. The "dot plot" signals only one more rate cut in 2026, diverging from market expectations of two cuts. Nevertheless, Powell explicitly ruled out the possibility of rate hikes, creating a relatively friendly environment for risk assets.

More notably, the Fed announced the launch of the Reserve Management Purchase (RMP) program in December, with plans to buy $40 billion in short-term government bonds over the next 30 days. While not traditional quantitative easing (QE), this essentially injects liquidity into the financial system to prevent banking sector risks. It is worth mentioning that the U.S. Treasury is simultaneously issuing large amounts of short-term debt to avoid pushing up long-term yields, and the Fed's purchases of the same securities highlight the complexity of liquidity management in the financial system.

Inflation risks intensify, commodities enter a bull market

Liquidity injections are directly reflected in asset prices. The dollar broke support and declined, precious metals prices surged, with silver hitting a record high of $64.3, up 120% year-to-date. Industrial metals like copper and aluminum are expected to follow suit, indicating the formation of a commodity bull market.

The Fed's policy divergence underscores rising inflation concerns. Nine votes supported the rate cut, while three opposed, marking the first dissenting votes in six years. Kansas City Fed Chair Esther George and Chicago Fed President Goolsbee advocated for holding rates steady, reflecting hawkish concerns about inflation resurgence. Fed Governor Mester supported a significant 50 basis point cut, highlighting internal disagreements.

RBA's hawkish stance and exchange rate opportunities

Compared to the Fed's easing stance, the Reserve Bank of Australia (RBA) has taken a markedly different policy direction. RBA Governor Lowe stated that the rate cut cycle is over, and policymakers are assessing whether to extend the pause or shift toward tightening. The November Consumer Price Index (CPI) reached 3.8%, well above the RBA's 2-3% target range, and inflation is expected to return to target only by mid-2027.

Given inflation pressures, markets now expect the RBA to raise rates in February next year, while the Fed leans toward further rate cuts. This divergence in monetary policy provides upward momentum for AUD/USD. As the world's largest iron ore producer and a major gold exporter, with over 8% of GDP from mining, Australia benefits from rising commodity prices, boosting both its economy and the Australian dollar.

Meanwhile, other currencies like the Japanese yen also exhibit volatility amid changing liquidity conditions. The trend of USD/JPY at 400 yen is also worth monitoring as a benchmark to understand regional monetary policy impacts.

Long-term support from macroeconomic environment improvement

The Fed raised its 2026 GDP growth forecast to 2.3%, an increase of 0.5 percentage points. The improved growth outlook helps reduce stagflation risks. Under Trump’s policy framework, U.S. fiscal stimulus is expected to support economic momentum, but it also exacerbates debt issues—U.S. national debt has surpassed $30 trillion for the first time, doubling in just seven years.

Tariffs, fiscal deficits, and inflation form an impossible triangle, but inflation effectively dilutes debt burdens. As inflation rises, U.S.-China trade negotiations are likely to make progress, highlighting opportunities in risk assets. Improvements in U.S. and Chinese economic conditions will further support the Australian dollar.

Technical breakout signals strong trend

The weekly chart of AUD/USD shows the pair consolidating around 0.6500, now breaking above 0.6600, indicating a strong bottoming pattern with bullish sentiment. If AUD/USD can hold above 0.6600, it may rebound to challenge 0.6900 in the near term, with 0.6550 serving as a medium-term support/resistance level.

Considering the policy divergence, commodity price increases, and macroeconomic improvements, AUD/USD is poised for a breakout. Investors should closely watch for rebound opportunities after key resistance levels are broken.