Expectations for the Reserve Bank of Australia’s (RBA) monetary policy have shifted, with potential rate hikes anticipated next year. This change in outlook has strengthened the Australian dollar (AUD), impacting currency pair forecasts such as GBP/AUD.
Over six weeks, the one-month Australian dollar Overnight Indexed Swap (AUD OIS) rate priced one year ahead increased from 3.08% to 4.07%. This indicates a reversal from previous predictions of rate cuts to possible hikes by the RBA. Governor Michele Bullock has dismissed further rate cuts and is open to raising rates if core inflation remains consistent and the labour market remains strong.
Monetary Policy Reversal
The recent RBA meeting reinforced the hawkish policy expectations. The possibility of rate hikes next year could result in a downward correction for cross rates like GBP/AUD. With the Australian dollar seen as a strong performer in future FX forecasts, the financial markets continue to adjust their expectations.
Expectations for the Reserve Bank of Australia have completely reversed, swinging from rate cuts to potential hikes in the coming year. Over the last six weeks, the market has moved from pricing around 50 basis points of RBA cuts to now pricing in close to 50 basis points of hikes. This hawkish turn suggests that derivative strategies should be positioned for a stronger Australian dollar.
The main driver was Governor Bullock’s meeting last night, where she effectively ruled out further rate cuts and opened the door to tightening if inflation remains stubborn. This view is supported by recent data from earlier in the quarter, when Q3 2025 core inflation was reported at 3.8%, well above the RBA’s target. The November labour market report also showed unemployment holding firm at a low 4.1%, giving the bank little reason to ease policy.
Strategic Market Positioning
Given this outlook, we see value in buying call options on the AUD/USD, targeting expiries in the first quarter of 2026 to capture further upward momentum. The sharp policy pivot has caught many off guard, and the Australian dollar has room to appreciate as more market participants adjust their positions. This provides a direct way to profit from anticipated AUD strength against the US dollar.
The shift also means traders should consider positions that benefit from rising short-term Australian interest rates. Interest rate futures contracts now reflect this new reality, with the March 2026 contract pricing in a high probability of at least one 25 basis point hike by then. Traders could look at receiving fixed in interest rate swaps to gain exposure to this upward trend in rates.
We believe the GBP/AUD cross has significant room to fall lower, representing a compelling opportunity. This is a story of policy divergence, as the Bank of England signals a potential pause or cuts due to recent UK Q3 GDP growth of just 0.1%. Buying put options on GBP/AUD would be a strategic way to position for a stronger AUD against a weaker sterling.
This sharp repricing in RBA policy will likely increase implied volatility in AUD currency pairs. As a result, the premiums on options will be more expensive than they were just a few weeks ago. Traders should be mindful of this higher cost when structuring new positions, ensuring potential profits justify the upfront expense.
