AUD/USD stalled at the beginning of the final trading week of 2025, falling below 0.6700 as market activity slowed down during the holiday period. Despite this, core influences are expected to remain stable moving into 2026, with the Reserve Bank of Australia (RBA) set to increase interest rates, supporting the Australian Dollar, while the Federal Reserve appears to lean towards more dovish policies.
Interest rate differentials between the RBA and the Federal Reserve are expected to extend further, potentially boosting the Australian Dollar and weakening the US Dollar. The Federal Reserve’s latest Meeting Minutes are in focus, with rate markets predicting at least two interest rate cuts from the Fed by September, aligning with the Fed’s dot plot that suggests moderate easing over the next two years.
Factors Influencing The Australian Dollar
The Australian Dollar is influenced by several factors, including RBA interest rates, the price of iron ore, the health of the Chinese economy, and Australia’s trade balance. High interest rates and positive trade balances tend to support the AUD, while weak Chinese economic performance or falling iron ore prices can negatively affect it. Moreover, Australia’s robust export market, particularly in iron ore to China, plays a role in the currency’s valuation.
The widening gap between central bank policies is the main story for us right now. The RBA is holding its cash rate firm at 4.85% to fight inflation, while the Fed just cut its rate to a 4.25-4.50% range. This policy split strongly suggests the Aussie dollar will outperform the greenback as we head into 2026.
Recent data backs this view, with US job growth in November 2025 slowing to just 95,000 and core PCE inflation cooling to 2.5%. In contrast, Australia’s Q3 2025 CPI was a hot 3.8%, giving the RBA every reason to maintain its hawkish stance. This fundamental economic data is what’s driving the expected currency move.
We should consider buying AUD/USD call options with expirations in late February or March 2026 to capitalize on the expected rally. This strategy offers a defined risk while providing exposure to significant upside potential once trading volumes return in January. Strike prices around the 0.6750 or 0.6800 level could offer a good balance of probability and reward.
Commodity Prices And Their Impact
The outlook is further supported by strong commodity prices, as iron ore continues to trade above $130 per tonne. This strength comes from China’s recent efforts to stimulate its economy, boosting demand for Australia’s key export. A healthy commodity market provides a solid foundation for the Aussie dollar’s strength.
This setup feels familiar, reminding us of the 2009-2011 period when a similar policy divergence occurred. Back then, the RBA’s aggressive rate hikes following the global financial crisis sent the AUD/USD soaring while the Fed was easing. History suggests that when these conditions align, the trend can be powerful and sustained.
