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AUD/USD holds near its 16-month high of 0.6940, reached in the previous session, currently trading around 0.6920 during the Asian hours on Tuesday. Traders now await the December Consumer Price Index (CPI) data due Wednesday for further clues on the Reserve Bank of Australia’s (RBA) policy outlook.

The Australian Dollar (AUD) draws support against the US Dollar (USD) as government bond yields have grown more attractive, with policy-sensitive three-year bond yield rising to 4.27%, the highest level since November 2023, supported by confidence in Australia’s top-tier credit rating and the central bank’s hawkish policy outlook.

Australia’s strong PMI data reinforced the likelihood of a tighter monetary policy from the Reserve Bank of Australia (RBA), supported by employment data. RBA policymakers acknowledged that inflation has eased significantly from its 2022 peak, though recent data suggests renewed upward momentum. Headline CPI slowed to 3.4% YoY in November but remains above the RBA’s 2–3% target band.

The AUD/USD pair could recover ground as the US Dollar (USD) comes under pressure from rising political uncertainty, with the US government heading toward a potential partial shutdown. Senate Democratic leader Chuck Schumer has vowed to oppose a funding package that includes appropriations for the Department of Homeland Security, leaving Congress facing a January 30 deadline to avert a shutdown.

Traders may also turn cautious amid uncertainty surrounding the Federal Reserve (Fed). US President Donald Trump said last week he would soon announce his nominee to replace Fed Chair Jerome Powell, fueling speculation that the next chair could favor faster interest rate cuts. Focus now shifts to Wednesday’s Fed policy announcement.

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