Australia’s December CPI report came in significantly hotter than expected, briefly spurring Aussie rallies before mixed market dynamics and FOMC uncertainty created choppy price action ahead of the Federal Reserve’s policy decision.
Which AUD strategies moved beyond the watchlist stage, and how did the combination of sticky inflation data and evolving risk sentiment impact the outcomes?
Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high-quality discretionary trade idea before working on a risk & trade management plan.
If you’d like to follow our “Watchlist” picks right when they are published throughout the week, check out our BabyPips Premium subscribe page to learn more!
We’re breaking down our Aussie setups this week and examining how each pair performed after the upbeat CPI release while markets navigated currency intervention speculation, the FOMC decision, and shifting geopolitical tensions.
The Setup
What We Were Watching: Australia Monthly CPI (December 2025)
- Expectation: Headline CPI to rise from 3.4% to 3.6% y/y and monthly CPI to jump from 0.0% to 0.9% m/m
- Data outcome: Headline CPI surged to 3.8% y/y (vs 3.6% expected), monthly CPI rose 1.0% m/m (vs 0.9% expected)
- Market environment surrounding the event: Currency intervention speculation dominated early week trading as reports surfaced of NY Fed rate checks on the yen. Markets were positioning cautiously ahead of Wednesday’s FOMC decision while processing President Trump’s comments about dollar weakness. Risk sentiment shifted from intervention fears Monday to broad dollar weakness Tuesday, then to mixed positioning ahead of the Fed decision Wednesday.
Event Outcome
Australia’s Consumer Price Index rose 3.8% y/y in December, up from 3.4% in November.
The monthly increase of 1.0% (0.2% seasonally adjusted) exceeded expectations and marked the fastest pace of annual inflation in several months, as electricity rebates expired and holiday travel demand surged, complicating the Reserve Bank of Australia’s policy outlook.
Key Takeaways:
- Annual CPI inflation accelerated to 3.8% from 3.4% in November, with the monthly increase reaching 1.0% in original terms
- Trimmed mean inflation rose to 3.3% annually from 3.2%, suggesting underlying price pressures remain elevated
- Electricity prices surged 21.5% year-over-year as state government rebates were exhausted, up from 19.7% in November
- Housing costs climbed 5.5% annually, driven by electricity, rents (+3.9%), and new dwellings (+3.0%)
- Services inflation accelerated to 4.1% from 3.6%, while goods inflation edged up to 3.4% from 3.3%
The Australian dollar jumped across the board after inflation came in much hotter than expected, with markets quickly pushing February RBA hike odds above 70%.
However, the move faded once traders looked under the hood. A big chunk of the upside came from energy costs, with electricity prices up 21.5% after state rebates expired, plus seasonal travel effects as recreation prices rose 7.4% and domestic holiday accommodation climbed 8.2%.
Even so, AUD kept a constructive tone through the session. The stickier part of the report mattered more, with services inflation accelerating to 4.1% from 3.6%. That kept RBA tightening expectations firmly in place heading into the FOMC decision.
Fundamental Bias Triggered: Bullish AUD Setups
Promoted: The Aussie will move fast when the data hits. Get the real-time feed that pros use to catch the news. Join FinancialJuice for Free!
Disclosure: We may earn a commission from our partners if you sign up though our links, at no extra cost to you.
Broad Market and Exogenous Drivers:
Intervention Speculation and Dollar Weakness (Monday-Tuesday): Markets kicked off the week fixated on talk of coordinated US-Japan currency intervention after Friday’s NY Fed rate checks on the yen. The dollar chopped around on Monday and still finished as the weakest major. Tuesday turned messy fast after Trump openly cheered dollar weakness, pushing the Greenback to its lowest level since early 2022 while gold ripped to fresh record highs above $5,180.
FOMC Decision and Mixed Signals (Wednesday): The Fed held rates at 3.50% to 3.75% as expected, but two dovish dissents from Governors Waller and Miran kept rate cut chatter alive. Earlier, Treasury Secretary Bessent’s strong dollar comments sparked a brief dollar bounce. Powell struck a steady tone, pointing to a firm economy and stressing Fed independence, which left FX markets without a clear directional cue.
Geopolitical Risk and Tech Selloff (Thursday-Friday): Risk appetite soured after weak Microsoft cloud guidance triggered a tech selloff. Trump’s escalating Iran rhetoric lifted crude prices and briefly sent gold spiking toward $5,600 before profit-taking set in. Friday stayed volatile as markets weighed speculation around Trump’s potential Fed Chair pick and what a Kevin Warsh nomination could mean for the dollar.
AUD/CHF: Bullish AUD Event Outcome + Risk-On Scenario = Arguably good odds of a net positive outcome
AUD/CHF 1-hour – Chart Faster With TradingView
Our bullish AUD/CHF watchlist highlighted the former resistance turned support zone near the .5370 pivot and 50% Fibonacci retracement as a key area where strong Australian inflation could trigger a bounce in a supportive risk backdrop.
The December CPI delivered the catalyst. Headline inflation printed at 3.8% versus 3.6% expected, with monthly CPI also beating at 1.0% versus 0.9%. Markets quickly repriced February RBA hike odds above 70%, and AUD/CHF jumped through the Asian session, validating the core thesis.
That said, the post-CPI environment offered two very different ways to trade the move.
Immediate post CPI entry:
Traders who bought AUD strength right after the fundamental validation likely captured the initial 50 to 80 pip push from around .5326 toward .5380 to .5398 through Asia and early London. This required confidence that sticky inflation would outweigh later concerns about one-off drivers.
As markets dug into the details, AUD/CHF retraced 30 to 40 pips from the highs when traders noted the headline was boosted by expiring electricity rebates and seasonal travel costs, even though services inflation jumped to 4.1% from 3.6%. This created whipsaw risk for late or poorly managed entries. Fortunately for the bulls, AUD/CHF was able to continue higher through the end of the Wednesday session, touching 0.5427 before topping out.
Pullback entry our primary strategy:
The watchlist update emphasized patience for a retracement into the .5350 to .5370 zone, covering the 50% to 61.8% Fibonacci area. The idea was simple. Even strong catalysts rarely produce straight moves, and pullbacks to defend breakout support are common.
That is exactly what played out. After the early CPI surge, AUD/CHF paused in the afternoon U.S. session, where the key test came around the FOMC. The event turned out to be a snoozer, but risk sentiment shifted hard negative, with AUD/CHF falling alongside broader risk assets amid geopolitical tensions and technology sector weakness.
After that round of volatility and focus shift from the broad markets, this allowed the Australian inflation story to dominate. AUD/CHF held firm in the .5360 to .5380 zone into the close, then pushed higher on Thursday as risk sentiment stayed constructive and China property easing headlines likely supported AUD. The pair climbed toward .5400 ahead of the weekly close.
Not Eligible to Move Beyond Watchlist – AUD/NZD & Bearish AUD Setups
GBP/AUD: Bullish AUD Event Outcome + Risk-Off Scenario
GBP/AUD 1-hour – Chart Faster With TradingView
Our analysts flagged downside risk for GBP/AUD toward long term triangle support if Australian CPI beat expectations and a risk off backdrop allowed safe haven flows and softer commodity demand to cap the Aussie despite hawkish RBA pricing.
The CPI release delivered the first half of that equation, with inflation printing at 3.8% versus 3.6% expected. The second half never showed up, though. Instead of risk-off conditions that would arguably favor Sterling and pressure commodity currencies, markets stayed cautiously optimistic into the FOMC and shifted to a more constructive tone after the Fed’s balanced hold and Powell’s measured remarks.
GBP/AUD was already in a January downtrend, sliding from above 2.0100 to the 1.9700 area ahead of the CPI release. The inflation surprise initially drove fresh AUD demand, pushing the pair lower toward 1.9550 and close to the 1.9500 major psychological level.
From there, momentum faded. As risk appetite improved, the Aussie struggled to extend gains against another risk-sensitive currency like Sterling. GBP/AUD bounced from the 1.9500 area through Thursday, reflecting the mismatch between a supportive inflation catalyst and an uncooperative risk backdrop.
The setup saw partial fundamental validation so it wasn’t the top choice to move beyond the watchlist stage, but the strong Australian inflation outcome applied downside pressure on GBP/AUD raising the odds of a successful short bias anyways.
AUD/USD: Bearish AUD Event Outcome + Risk-Off Scenario
AUD/USD 1-hour – Chart Faster With TradingView
Our watchlist setup looked at a potential bearish pullback to the 38.2% Fib retracement level on AUD/USD in the event the Australian CPI surprised to the downside. This scenario did not materialize, however, as the figures beat estimates and highlighted hawkish RBA expectations, invalidating AUD/USD from moving beyond the watchlist stage.
Instead of retreating from its recent highs, the pair pushed through the .6950 minor psychological resistance up to .7000 even before the CPI was released, while dollar weakness turned out to be a main theme early in the week, invalidating the pullback setup before the target event.
Although the actual inflation report barely busted AUD/USD out of its holding pattern then, it placed the pair in a solid position to take further advantage of midweek risk-taking & recent broad U.S. dollar weakness all the way up to the .7100 major psychological resistance. This proved to be a strong ceiling that forced the pair to retreat back to its pre-CPI levels towards the back half of the week while risk-off flows picked up, but AUD/USD still managed to hold steady around the .7000 mark.
AUD/NZD: Bearish AUD Event Outcome + Risk-On Scenario
AUD/NZD 1-hour – Chart Faster With TradingView
Our analysts flagged AUD/NZD testing the area of interest around a descending trend line and the pivot point level (1.1578) ahead of the Australian CPI release, projecting that a continuation of the selloff could take place if the numbers come in below estimates in a risk-on scenario.
However, the actual results surprised to the upside, enough to keep hawkish RBA expectations well-anchored, and invalidating a bearish bias on AUD/NZD.
This, in combination with a complex market environment midweek, led AUD/NZD to bust through the falling resistance zone and test the next upside barrier at R1 (1.1632) before retreating.
The area of interest continued to hold as an inflection point, later on providing support for the pair to go for another test of the intraweek highs, which still held as resistance when risk-off flows accelerated on weak U.S. tech earnings.
AUD/NZD dipped back to the pivot point and eventually dipped below the trend line on Friday’s close, as some broader risk-taking returned while the Kiwi retained a slight advantage on improving domestic conditions.
The best way to turn these strategy recaps into personal growth is to merge them with your own data. Import these setups into your trading journal to see how they would have interacted with your specific risk profile.
Still using spreadsheets (or nothing at all)? It’s time to automate! Check out TradeZella, the AI-powered journal that identifies your behavioral leaks for you.
Premium Perk: BabyPips Premium Annual members get an exclusive 30% discount on TradeZella Annual subscription—saving $120 in the first year.
Click here to learn more about Babypips Premium and Tradezella!
The Verdict
The Australian CPI release delivered an upside surprise in headline figures, though underlying components still sparked some doubts on RBA tightening prospects. Still, February rate hike expectations appeared supported enough to bring further AUD upside while risk sentiment also favored higher-yielding currencies around the time of the release.
The early part of the week was characterized by uncertainties weighing on the U.S. economy and dollar, fueling the dovish Fed narrative that kept risk assets supported. Dissenting votes in the Fed decision also sparked some risk rallies that also worked in the Aussie’s favor, though a turnaround was seen during the latter half when weak U.S. tech earnings and a possibly hawkish Fed Chair appointee weighed on sentiment.
Although AUD/CHF initially dipped slightly below the retracement zone ahead of the target event due to anti-dollar flows diverting towards the safe-haven franc, the pair was in a good position to take advantage of stronger-than-expected Australian CPI results while the Fed also delivered a “balanced hold” that turned some of the market focus back to monetary policy divergences.
With that, the pair was able to pull off a steady climb in the sessions following the CPI release, as sentiment continued to lean in favor of risk assets. The swing high proved to be a strong ceiling, and AUD/CHF soon retreated back to the area of interest when risk-off flows resumed on weak U.S. tech earnings and hawkish Fed Chair speculations.
Entry scenarios discussed above took the shifting market environment into account, as the immediate post-CPI entry would have captured the initial 50-80 pip push that lasted hours after the target event. The primary pullback entry strategy played out as well and it highlighted patience in waiting for a dip after an initial strong bullish reaction, as the hawkish RBA narrative sustained AUD gains amid constructive risk sentiment and Chinese property sector regulatory easing later in the week.
Overall, we’d rate this week’s discussion as “highly likely” supportive of a potential positive outcome. The upside inflation surprise, backed by the anti-dollar situation and dovish Fed favoring risk-taking, put AUD/CHF in a strong position to benefit from well-anchored hawkish RBA speculations as traders positioned for the upcoming February announcement.
The moves also responded well to the technical triggers discussed in the watchlist, with the Fib retracement levels spanning an area of interest that held as support after the target event, and price action staying on the right side of the entry zone before sentiment shifted sharply towards the end of the week.
Key Takeaways:
Headline Beats Require Compositional Analysis
Australia’s 3.8% CPI print easily cleared the 3.6% forecast, but the initial AUD pop faded once traders broke down the drivers. One-off factors related to electricity costs and seasonal travel led markets to doubt the sustainability of the pickup in inflationary pressures. Still, elevated services inflation kept hawkish RBA bets in play, supporting AUD beyond its initial reaction.
This is a reminder that markets care less about the headline and more about which components influence policy, and trading success hinged on spotting that distinction quickly. This can be put in practice by holding out during the initial reaction and waiting for markets to digest the data before jumping in trade positions.
FOMC Neutrality Amplified Individual Currency Stories
The Fed’s hold at 3.50% to 3.75%, paired with two dovish dissents, delivered a balanced outcome that left the dollar without a strong directional push. That neutrality was key, as it allowed pairs like AUD/CHF to trade on their own fundamentals rather than being dragged around by broad USD flows. With no hawkish or dovish shock from the Fed, Australia’s sticky inflation and relative RBA stance were able to drive price action more cleanly, highlighting how neutral central bank messaging can sharpen policy divergence trades.
Pullback Strategies Outperform Momentum Chasing in Complex Environments
The gap between the Australian CPI release and the FOMC decision rewarded patience. Instead of chasing the CPI pop, waiting for AUD CHF to pull back to the .5370 confluence zone delivered materially better entry pricing while confirming RBA expectations and avoiding a hawkish Fed surprise. In event heavy weeks, letting price come to support usually beats sizing in at momentum highs on risk reward.
Feed from Babypips.com