AUD/USD stopped moving at the start of the last trading week of 2025, dropping below 0.6700 as trading slowed during the holiday season. Still, key factors are expected to remain steady as we enter 2026. The Reserve Bank of Australia (RBA) is likely to raise interest rates, which should help the Australian Dollar. Meanwhile, the Federal Reserve seems to be adopting a more cautious approach. The difference in interest rates between the RBA and the Federal Reserve is expected to widen, which could strengthen the Australian Dollar and weaken the US Dollar. The Federal Reserve’s recent Meeting Minutes are important, as market predictions suggest at least two interest rate cuts by the Fed by September. This aligns with the Fed’s dot plot, indicating a moderate easing trend over the next two years.

Factors Influencing The Australian Dollar

Several factors impact the Australian Dollar, such as RBA interest rates, iron ore prices, the Chinese economy’s health, and Australia’s trade balance. High interest rates and positive trade balances often support the AUD, while a weak Chinese economy or falling iron ore prices can hurt it. Additionally, Australia’s strong export market, especially for iron ore to China, is crucial for the currency’s value. The key story now is the increasing gap between the central banks’ policies. The RBA is keeping its cash rate stable at 4.85% to tackle inflation, while the Fed has reduced its rate to a range of 4.25-4.50%. This difference strongly suggests that the Aussie dollar will perform better than the US dollar as we move into 2026. Recent information supports this idea, with US job growth slowing to 95,000 in November 2025 and core PCE inflation dropping to 2.5%. In contrast, Australia’s Q3 2025 CPI was a high 3.8%, giving the RBA strong reasons to continue its aggressive approach. This economic data is driving the expected currency movements. We might consider purchasing AUD/USD call options expiring in late February or March 2026 to benefit from the anticipated rise. This strategy carries defined risks while allowing for significant gains once trading volumes pick up in January. Strike prices around 0.6750 or 0.6800 could provide a good balance between probability and reward.

Commodity Prices And Their Impact

The outlook is boosted by robust commodity prices, with iron ore still trading over $130 per tonne. This strength stems from China’s recent economic stimulus efforts, which have increased demand for Australia’s key export. A strong commodity market lays a solid foundation for the Australian dollar’s strength. This situation feels reminiscent of the 2009-2011 period when a similar policy gap occurred. Back then, aggressive rate hikes by the RBA after the global financial crisis caused the AUD/USD to rise sharply while the Fed was easing. History shows that when these conditions align, the trend can be strong and sustained. Create your live VT Markets account and start trading now.

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