The Australian Dollar (AUD) is gaining support from expected domestic factors, including potential rate hikes by the Reserve Bank of Australia (RBA) by 2026. The RBA is anticipated to begin tightening on February 3, with markets currently estimating a 60% chance of this happening.

New Zealand’s Economic Recovery

New Zealand’s economic recovery is also likely to boost the New Zealand Dollar (NZD) in the coming months. Economists forecast rate hikes from both the RBA and the Reserve Bank of New Zealand (RBNZ) in 2026. While New Zealand’s hike may come a bit later, its economic recovery is gaining strength due to supportive fiscal policy ahead of the general election on November 7. As the RBA meets on February 3, we see domestic factors boosting the Australian Dollar. Currently, markets are pricing in about a 60% chance of a rate hike at this meeting, which could allow the AUD to strengthen further if the RBA tightens policy. This expectation is supported by recent inflation data for the fourth quarter of 2025, which showed the Consumer Price Index at 3.7%, significantly above the RBA’s target. The central bank has made it clear that controlling inflation is its main priority. Additionally, the December 2025 labor report confirmed the economy’s strength, with the unemployment rate remaining low at 3.9%.

Trader Strategies

For traders, this situation offers a clear opportunity ahead of the meeting. We recommend buying short-dated AUD/USD call options that expire after the February 3 announcement. This way, traders can benefit from potential gains while limiting their maximum loss to the premium paid. However, since a rate hike is not fully priced in, if the RBA decides to hold rates steady, this could lead to a sudden drop in the AUD. To manage this risk, a long straddle strategy—buying both a call and a put option—could be a smart move. This approach allows traders to profit from significant price swings in either direction following the RBA’s announcement. Reflecting on the last major tightening cycle in 2022 and 2023, we often saw the AUD rising in the days leading up to a rate decision, particularly when a hike was anticipated. This trend suggests that building a bullish position in the upcoming week may be beneficial, reinforcing the potential for a rates-driven increase. Meanwhile, economic data from New Zealand indicates a firm recovery, which could also lift the New Zealand Dollar later this year. Retail sales figures for the last quarter of 2025 showed a surprising bounce back after previous weakness. While the RBNZ is expected to increase rates after the RBA, this momentum is a positive indication for the NZD. Create your live VT Markets account and start trading now.

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