The Australian Dollar (AUD) is being supported by anticipated domestic factors, with expectations of rate hikes from the Reserve Bank of Australia (RBA) by 2026. The RBA is expected to start this tightening on 3 February, and markets currently estimate a 60% probability of such a move.
New Zealand’s Economic Recovery
Furthermore, New Zealand’s economic recovery could create upward opportunities for the New Zealand Dollar (NZD) in the upcoming months. Economists predict rate hikes from both the RBA and the Reserve Bank of New Zealand (RBNZ) in 2026. While New Zealand’s rate hike might occur later, its recovery gains strength through supportive fiscal policy before their general election on 7 November.
With the Reserve Bank of Australia meeting on February 3rd, we see domestic factors supporting the Australian dollar. Markets are currently pricing in about a 60% chance of a rate hike at that meeting. This leaves room for the AUD to strengthen further if the RBA does decide to tighten policy.
This expectation for a hike is not unfounded, as the fourth-quarter inflation data for 2025, released last week, showed the Consumer Price Index remained elevated at 3.7%, well above the RBA’s target band. The central bank has been clear that taming inflation is its top priority. The strength of the economy was also confirmed by the December 2025 labour report, which showed the unemployment rate holding steady at a low 3.9%.
Trader Strategies
For traders, this creates a clear opportunity in the lead-up to the meeting. We believe purchasing short-dated AUD/USD call options expiring after the February 3rd announcement is a prudent way to position for a hawkish outcome. This strategy allows for participation in the upside potential while capping the maximum loss at the premium paid.
However, since a rate hike is not fully priced in, a decision by the RBA to hold rates could cause a sharp reversal and weakness in the AUD. Given this binary risk, a long straddle strategy, involving the purchase of both a call and a put option, could be effective. This would allow a trader to profit from a significant move in either direction following the central bank’s announcement.
Looking back to the last major tightening cycle in 2022 and 2023, we often observed the AUD rallying in the days before a rate decision where a hike was anticipated but not guaranteed. This historical pattern suggests building a bullish position in the coming week could be advantageous. This precedent reinforces the potential for rates-driven strength.
Meanwhile, economic data from New Zealand is also showing signs of a firming recovery, which could present upside for the New Zealand dollar later in the year. We noted that retail sales figures for the final quarter of 2025 showed a surprising rebound after a period of weakness. While the RBNZ is expected to hike later than the RBA, this underlying momentum is a positive sign for the NZD.
