Expectations for the Reserve Bank of Australia’s (RBA) monetary policy have changed. Rate hikes are now expected next year, boosting the Australian dollar (AUD) and affecting currency forecasts, like GBP/AUD. In the past six weeks, the Australian dollar Overnight Indexed Swap (AUD OIS) rate for one year rose from 3.08% to 4.07%. This shift marks a transformation from earlier predictions of rate cuts to the potential for rate increases by the RBA. Governor Michele Bullock has ruled out further rate cuts and is open to raising rates if core inflation and the labor market remain strong.

Monetary Policy Shift

The latest RBA meeting confirmed expectations for a tougher monetary policy. Interest rate hikes next year could lower rates for cross currency pairs like GBP/AUD. With the Australian dollar expected to perform well in future foreign exchange forecasts, financial markets are adjusting their predictions. In just a few weeks, the outlook for the RBA has completely reversed from anticipating rate cuts to predicting hikes next year. The market now expects nearly 50 basis points of hikes instead of cuts. This hawkish shift means that traders should adjust their strategies for a stronger Australian dollar. The chief factor behind this change was Governor Bullock’s comments at last night’s meeting. She ruled out any more rate cuts and indicated that rates could go up if inflation remains high. Recent data supports this view, showing that core inflation in Q3 2025 was at 3.8%, above the RBA’s target. Additionally, the November labor market report showed unemployment steady at a low 4.1%, leaving little room for the RBA to ease its policy.

Market Positioning Strategies

With this new outlook, buying call options on the AUD/USD seems wise. Targeting expiries in the first quarter of 2026 could harness further growth. The rapid policy change has surprised many, and the AUD has the potential to rise as more market players adjust their positions. This strategy offers a clear path to profit from expected AUD strength against the US dollar. Traders should also consider positions that benefit from rising Australian short-term interest rates. Interest rate futures now reflect this change, with the March 2026 contract showing a high chance of at least one 25 basis point hike. Consider receiving fixed in interest rate swaps to tap into this trend. We believe there is significant potential for the GBP/AUD cross to fall, presenting an attractive opportunity. Current conditions reflect policy divergence, as the Bank of England may pause or cut rates due to UK’s recent GDP growth of just 0.1%. Buying put options on GBP/AUD would position traders advantageously for a stronger AUD against a weaker British pound. The recent shift in RBA policy will likely increase implied volatility in AUD currency pairs. Therefore, options premiums will now be higher than they were a few weeks ago. Traders should be aware of these increased costs when planning new positions, ensuring that potential profits outweigh the initial investment. Create your live VT Markets account and start trading now.

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