The Australian Dollar is gaining strength against the US Dollar following the Reserve Bank of Australia’s (RBA) December meeting minutes. These minutes pointed to possible future interest rate reviews, as inflation pressures may last longer than expected. The ASX 30-Day Interbank Cash Rate Futures for February 2026 indicate there is a 27% chance of a rate hike at the next RBA meeting. The US Dollar Index (DXY) has dropped and is now around 98.20. The US economy’s growth for Q3 is expected to be 3.2%, down from 3.8% in Q2. The US Dollar is facing pressure from a surge in precious metals linked to geopolitical tensions with Venezuela.

Probability of Rates and Inflation Expectations

There is an 80% chance that the Federal Reserve will keep interest rates steady in January. The possibility of a 25-basis-point rate cut has fallen to 20%. The Consumer Sentiment Index dipped to 52.9 in December. In Australia, Consumer Inflation Expectations have risen to 4.7%, aligning with the RBA’s aggressive stance. Currently, the AUD/USD pair is trading below 0.6660, with possible targets at 0.6685 and 0.6707. Key support is around 0.6633, and if it breaks, we could see the August low near 0.6414. With the RBA and the Fed taking different approaches, the trend appears to favor the Australian Dollar into early 2026. The RBA is hinting at a hawkish stance, and markets are now considering a rate hike in February. Conversely, the Federal Reserve may pause or even lower rates. This difference in policy is the main factor to consider in our strategy over the next few weeks. Additionally, the economic situation in Australia is improving, which supports the RBA’s position. Iron ore prices, a vital Australian export, have remained strong, recently trading above $135 per tonne—much higher than early 2025 levels. This growth supports the Australian economy and its currency.

Strategies for Rising and Falling AUD/USD

On the flip side, the US economy shows signs of slowing down. Q3 GDP growth has slowed, and consumer sentiment has dropped in December. While US inflation expectations have increased, the headline CPI has remained above 3% for much of 2025, making it hard for the Fed to avoid a recession. This uncertainty is putting pressure on the US Dollar. For traders dealing in derivatives, this suggests focusing on strategies that benefit from a rising AUD/USD. We should think about buying call options with strike prices targeting the 0.6700 level and higher, especially for expirations after the February 2026 RBA meeting. One-month implied volatility for the pair has already reached 9.5%, indicating market expectations of a movement. However, we need to manage risk; if the pair fails to break the three-month high at 0.6685, we may see a reversal. To hedge long positions, we can buy put options with strike prices below the key support level around 0.6630. A more cost-effective option would be to establish bull call spreads to limit both potential gains and risks. Upcoming key events include the Fed’s January meeting and the RBA’s February meeting. We expect volatility to spike around these dates. Trading strategies like straddles or strangles could be effective if we anticipate a big price movement but are unsure of the direction after a specific announcement. Create your live VT Markets account and start trading now.

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