AUD/USD has climbed to around 0.6710 as traders await the December minutes from the Federal Open Market Committee (FOMC). The Fed indicated it plans to reduce interest rates once in 2026. The Reserve Bank of Australia (RBA) is expected to adopt stricter monetary policies next year.

RBA Expectations

The Australian Dollar strengthened during the European session as expectations for RBA tightening in 2026 grew. RBA officials have recently shown readiness to change policies if inflation does not decrease as predicted. As the RBA is set to decide on its policy in February, the upcoming release of November’s CPI data in January is crucial. In the meantime, the US Dollar remains stable ahead of the FOMC meeting outcomes. The Fed recently lowered interest rates by 25 basis points to a range of 3.50%-3.75%. The future of the US Dollar will depend on who the Fed Chair will be, with an announcement expected in January. Donald Trump has indicated that this announcement is coming soon. The Federal Reserve aims to maintain price stability and full employment by adjusting interest rates. The FOMC meets eight times a year to assess economic conditions and policies. During economic downturns, the Fed may use Quantitative Easing (QE), which usually weakens the US Dollar. In contrast, Quantitative Tightening (QT) tends to strengthen the Dollar.

Strategic Approaches

There’s a notable policy difference between the RBA and the Fed, suggesting a potential rise for AUD/USD in the coming weeks. The Fed has already cut rates three times in 2025 as the US economy slows, evident in the November Non-Farm Payrolls report, which showed only 95,000 new jobs. This growing gap supports strategies that benefit from a stronger Australian Dollar against the US Dollar. In January, we will closely watch Australia’s November CPI data. October’s inflation was reported at 4.1% year-over-year, well above the RBA’s target range of 2-3%, which justifies its hawkish approach. We recommend buying AUD call options expiring in February 2026 as a smart way to prepare for a possible upside surprise in inflation, which would strengthen the case for an RBA rate hike. While the Fed has signaled only one rate cut for 2026, the FOMC minutes out later today could show differing opinions on this issue. Furthermore, the announcement of a new Fed Chair in January brings uncertainty. The speculation around candidates ranges from hawkish to dovish, suggesting potential volatility in the USD that may not be fully priced in, making long volatility strategies appealing. Considering the persistent inflation challenges of 2022 and 2023, central banks are cautious about easing policies too quickly. A sudden drop in Australian inflation or a more hawkish Fed Chair than expected are the main risks to our positive outlook on AUD. Therefore, using defined-risk strategies like AUD/USD call spreads, rather than simply taking long positions, can help manage potential risks. Create your live VT Markets account and start trading now.

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