AUD/USD rose by almost 1% above 0.7000 following the RBA’s latest interest rate hike. The RBA’s decision led to the Australian Dollar outperforming other currencies, with a notable increase against the Japanese Yen.
The RBA increased interest rates by 25 basis points to 3.85% due to inflation risks. The previous quarter saw a CPI growth at an annualised 3.6%, up from 3.2%, while December’s CPI was at 3.8% Year-on-Year, exceeding the expected 3.6%.
The US Dollar Steady Amid Federal Shutdown
The US Dollar remains steady amid a partial federal shutdown. The US Dollar Index is around 97.60, near its weekly peak. The US ISM data indicated manufacturing sector growth, with PMI increasing to 52.6 from December’s 47.9.
Upcoming economic indicators include the US ADP Employment Change and ISM Service PMI data, set for release on Wednesday. The RBA’s interest rate decisions, announced eight times a year, affect the Australian Dollar’s strength, depending on their economic outlook—hawkish decisions bolster, while dovish ones weaken the AUD.
The last RBA interest rate release matched the consensus and was an increase from the previous 3.6%.
Governor Bullock’s Hawkish Tone
The Reserve Bank of Australia has made it clear that fighting inflation is its main priority, raising rates to 3.85%. Governor Bullock’s hawkish tone suggests more rate hikes could be coming in the next few months. This environment makes buying AUD call options an attractive strategy to profit from potential upside in the currency.
However, we must watch the strength of the US dollar, which is holding firm near 97.60 on the index. The recent US ISM manufacturing data for January was surprisingly strong, showing a return to expansion. Upcoming US employment and services data this week could further boost the greenback and cap gains for the AUD/USD pair.
The 0.7000 level has historically been a major pivot point for the pair, often acting as strong resistance. Given the opposing strengths of the hawkish RBA and a resilient US economy, implied volatility is likely elevated. Selling an out-of-the-money strangle could be a way to collect premium if the pair remains in a tight range after the initial excitement.
Looking back, the inflation data from late 2025 showed core components remained stubbornly high, justifying the RBA’s aggressive stance today. On the other side, the US labor market has shown persistent strength, with the last Non-Farm Payrolls report of 2025 exceeding expectations by adding 235,000 jobs. This data supports the view that the Federal Reserve will be in no hurry to cut its own rates.
We noted that the Australian dollar showed the most strength against the Japanese Yen. This is significant because the Bank of Japan’s policy remains far more accommodative than the RBA’s. For those bullish on the Aussie but wary of US dollar strength, a long AUD/JPY position through futures or options may offer a cleaner trend.
