The Reserve Bank of Australia (RBA) has increased the cash rate target by 25 basis points to 3.85%, marking the first such adjustment since 2023. This move aligns with market expectations as inflation rates are predicted to stay above target for a while.
Following the rate hike, the AUD/USD value surged past 0.7000. The unanimous decision by the RBA also pointed towards potential future increases, citing faster-than-anticipated private demand growth, heightened capacity pressures, and tight labour market conditions.
Policy Divergence With The Federal Reserve
A policy divergence between the RBA and the Federal Reserve is bolstering the upward trend in AUD/USD. Analysts note these developments are likely to influence market behaviour in the foreseeable future.
Looking back at the Reserve Bank of Australia’s decision in 2025 to restart its hiking cycle was a key turning point. That move to 3.85% signaled a divergence from the U.S. Federal Reserve that we have seen play out. It set the stage for the Australian dollar’s continued strength over the past year.
As of today, we see the RBA cash rate holding at 4.35% following two more hikes in late 2025. The latest quarterly inflation data for Q4 2025 came in at 3.5%, still above the target band but trending down, suggesting the RBA will likely remain on hold for now. Meanwhile, the most recent labour report showed unemployment ticking up slightly to 4.1%, easing pressure for further immediate tightening.
This contrasts with the United States, where the Fed Funds Rate is at 4.00% and markets are pricing in the possibility of a rate cut by the third quarter of 2026. Recent U.S. inflation figures have cooled more significantly to 2.8%, and last month’s non-farm payrolls showed a clear softening in the American labor market. This sustained rate differential in favor of Australia continues to support the Aussie dollar.
Trading Strategy And Market Outlook
Given this environment, derivative traders should maintain a bullish bias on the AUD/USD, which is currently trading near 0.7350. Buying call options with strike prices around 0.7400 for the coming months offers a defined-risk way to capitalize on further upside. This strategy benefits from the underlying policy divergence that remains firmly in place.
However, since the RBA’s hiking cycle has likely peaked, explosive upward moves may be limited. Traders could consider selling out-of-the-money put options to collect premium, betting that the interest rate advantage will provide a floor for the currency pair. This approach profits from time decay and sideways-to-upward price action.
All eyes will be on the RBA’s statement from their meeting today for any change in tone regarding future policy. Additionally, the upcoming U.S. CPI and employment reports will be critical in confirming whether the Fed is genuinely moving towards an easing cycle. Volatility could increase around these key data releases.
