The Australian Dollar is nearing a 14-month high of 0.6727, thanks to predictions of interest rate hikes from the Reserve Bank of Australia (RBA). The RBA is prepared to tighten its policy if inflation continues to rise, especially with the Q4 Consumer Price Index (CPI) report coming on January 28. Trading volumes are low due to the New Year’s holiday in Australia. The US Dollar Index is steady around 98.00, even with expectations for more rate cuts from the Federal Reserve in 2026. The Fed already cut rates by a total of 75 basis points in 2025. There’s an 83.9% chance rates will stay the same at the Fed’s January meeting, while the possibility of a 25-basis-point cut has dropped to 16.1%.

Inflation and RBA Rate Speculation

Australia’s inflation reached 3.8% in October 2025, which is above the RBA’s target range. People are speculating about a possible rate increase in February 2026, predicting it could rise to 3.85%. Currently, the Australian Dollar is trading around 0.6690 and might break through the resistance level at 0.6700. The Australian Dollar is performing best against the Japanese Yen. In December, inflation expectations in Australia rose to 4.7%, supporting the RBA’s position. FAQs from the central bank explain how central banks control inflation and interest rates. We expect the Australian Dollar to strengthen against the US Dollar in the coming weeks. This is mainly due to the different directions of our central banks. The RBA is ready to raise interest rates, while the US Federal Reserve is likely to keep cutting them in 2026. The key date to watch is January 28, 2026, when Australia’s Q4 inflation data is released. If inflation exceeds expectations, the RBA may increase its cash rate at its meeting on February 3. A similar situation occurred in 2022 and 2023, when rising inflation caused the RBA to aggressively hike rates, pushing the cash rate from 0.10% to over 4% within about 18 months.

US Federal Reserve’s Rate Cut Path

Meanwhile, the US Federal Reserve has already cut rates by 75 basis points in 2025 and is signaling more cuts are likely. Although recent US data, like the 4.3% GDP growth in Q3 2025, looks strong, the Fed seems focused on easing rates. This trend makes holding US Dollars less appealing compared to the Australian Dollar. For traders, buying call options on the AUD/USD pair could be a smart move. Options that expire in mid-February 2026 will take advantage of the potential volatility from the upcoming Australian inflation report and the RBA meeting. This strategy allows us to profit if the AUD/USD rises as anticipated. We should also pay attention to key levels on the charts. The immediate target is the 0.6727 high, with the potential to rise to 0.6840 if the momentum continues. A drop below 0.6670 would suggest that our optimistic outlook may be incorrect. Finally, China’s plans to strengthen its economy could further boost the Aussie Dollar. As Australia’s largest trading partner, a healthier Chinese economy increases demand for Australian exports, thereby supporting our currency. Historically, a 1% increase in China’s industrial production has often resulted in higher demand for Australian commodities. Create your live VT Markets account and start trading now.

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