The Reserve Bank of Australia (RBA) has raised its cash rate target by 25 basis points to 3.85%. This is the first change since 2023 and is in line with what the market expected, as inflation is likely to remain above target for some time. After the hike, the AUD/USD rose above 0.7000. The RBA’s unanimous decision suggests more rate increases may be on the way, citing stronger private demand, growing capacity pressures, and a tight job market.

Policy Divergence With The Federal Reserve

The gap between RBA and Federal Reserve policies is strengthening the AUD/USD. Analysts believe these changes will affect market trends in the near future. Looking back, the RBA’s decision in 2025 to restart rate increases was a major shift. Moving to 3.85% marked a departure from the U.S. Federal Reserve’s approach, contributing to the Australian dollar’s strong performance over the past year. Currently, the RBA cash rate stands at 4.35% after two more hikes in late 2025. The latest inflation data for Q4 2025 is 3.5%, which is still above the target but decreasing, indicating the RBA may hold steady for now. The recent labor report shows unemployment has slightly increased to 4.1%, reducing the immediate need for tightening. In contrast, the U.S. Federal Funds Rate is at 4.00%, and markets are considering a possible rate cut by the third quarter of 2026. Recent U.S. inflation dropped significantly to 2.8%, and last month’s jobs report indicated a slowdown in the U.S. labor market. This ongoing rate difference benefits the Australian dollar.

Trading Strategy And Market Outlook

In this environment, derivative traders should stay bullish on AUD/USD, which is currently close to 0.7350. Buying call options with strike prices around 0.7400 for the upcoming months offers a low-risk way to take advantage of potential gains. This strategy leverages the existing policy gap. However, since the RBA’s rate hikes have likely reached their peak, large upward swings may be limited. Traders might consider selling out-of-the-money put options to earn premium, betting the rate advantage will support the currency pair. This tactic can profit from time decay and stable to rising prices. All eyes are on the RBA’s statement from today’s meeting for clues about future policy directions. Also, upcoming U.S. CPI and employment reports will be vital in confirming if the Fed is genuinely shifting toward easing. Expect increased volatility around these key data releases. Create your live VT Markets account and start trading now.

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