The Australian Dollar is approaching a 14-month high of 0.6727, supported by expectations of interest rate increases from the Reserve Bank of Australia. The RBA is ready to tighten policy if inflation doesn’t moderate, with a focus on the Q4 CPI report due January 28. Volume is low due to the New Year’s holiday in Australia.<\/p>\n
The US Dollar Index is holding steady around 98.00, despite expectations for further rate cuts by the Federal Reserve in 2026. The Fed has already delivered a cumulative 75 basis points rate cut in 2025. There’s an 83.9% probability of rates being held at the Fed\u2019s January meeting, with the likelihood of a 25-basis-point rate cut decreasing to 16.1%.<\/p>\n
Australia\u2019s inflation rose to 3.8% in October 2025, above the RBA’s target range. There is speculation of a rate hike during February 2026, with projections of a rise to 3.85%. The Australian Dollar trades around 0.6690, with the potential to break through resistance at 0.6700.<\/p>\n
The Australian Dollar is the strongest against the Japanese Yen. In December, Australia’s inflation expectations rose to 4.7%, reinforcing the RBA’s stance. Central Bank FAQs outline the role and decision-making process of central banks in controlling inflation and interest rates.<\/p>\n
We see the Australian dollar strengthening against the US dollar in the coming weeks. The main reason is the difference in direction between our central banks. The Reserve Bank of Australia is ready to raise interest rates, while the US Federal Reserve is expected to continue cutting them in 2026.<\/p>\n
The key date to watch is January 28, 2026, when Australia’s fourth-quarter inflation data is released. If inflation is higher than expected, the RBA could raise its cash rate at its meeting on February 3. We saw a similar situation back in 2022 and 2023, when stubborn inflation forced the RBA to hike rates aggressively, pushing the cash rate from 0.10% to over 4% in about 18 months.<\/p>\n
On the other side, the US Federal Reserve has already cut rates by 75 basis points during 2025 and is signalling more cuts are likely. While recent US data like the 4.3% GDP growth in the third quarter of 2025 is strong, the Fed’s overall path appears set on easing. This makes holding US dollars less attractive compared to the Australian dollar.<\/p>\n
For traders, this suggests buying call options on the AUD\/USD pair could be a good strategy. Options expiring in mid-February 2026 would capture the potential volatility from both the Australian inflation report and the subsequent RBA meeting. This approach allows us to profit if the AUD\/USD rises as we expect.<\/p>\n
We should also watch key technical levels from the charts. The immediate target is the 0.6727 high, with a potential to move towards the 0.6840 level if momentum continues. A break below the 0.6670 area would signal that our bullish view might be wrong.<\/p>\n
Finally, China\u2019s plans to boost its economy could provide an additional lift for the Aussie dollar. As Australia’s largest trading partner, a healthier Chinese economy increases demand for Australian exports, which strengthens our currency. Historically, a 1% increase in China’s industrial production has often led to a noticeable uptick in demand for Australian commodities.<\/p>\n
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