Are Rate Hikes Back on the Table for RBA

Three of the four major Australian banks have ruled out the possibility of any further cuts in cash rates by the Reserve Bank of Australia (RBA). Only Westpac expects monetary easing mid-2026, against the expectations of a more hawkish stance by Commonwealth Bank (CBA), Australia & New Zealand Banking Group (ANZ) and National Australia Bank (NAB). The RBA lowered interest rates three times in 2025, bringing the cash rate down to 3.6%. For traders with portfolios exposed to the Australian markets, this could be a time to reassess your trading strategies and realign your assets.

Is the RBA Becoming Hawkish?

Central banks adjust interest rates to ensure price stability, achieve their mandated monetary goals and support sustainable economic growth of the country. Their decisions rely on certain parameters.

Persistent Inflation

In October 2025, the annual Consumer Price Index (CPI) in Australia stood at 3.8%, up from the September CPI of 3.6% and moving away from the RBA’s sustainable range of 2% to 3%. According to the RBA Governor, Michele Bullock, this could “have implications for the future path of monetary policy.” Central banks raise interest rates to bring prices back under control. This is because higher interest rates reduce aggregate demand, lowering overall economic activity. As borrowing becomes more expensive than saving, especially for businesses, companies end up spending less. This helps cool the economy.

Tight Labour Market

The unemployment rate in Australia declined to 4.3% in October 2025. Such a low unemployment rate puts upward pressure on wages. Higher wages tend to lead to fuel inflation as consumption rises. This can be seen in the seasonally adjusted household spending in Australia surging nearly 1.3% month-on-month in October 2025, 5.6% higher than the seasonally adjusted level a year ago. Given that historically, consumption grows during the holiday season, the markets expect the momentum to continue through December. Higher consumption demand drives inflation.

Rising Commodity Prices

The Australian dollar (AUD) is a commodity currency since the nation is a major exporter of raw materials, such as iron and copper. Copper surged 32.40% year-to-date as of December 8, 2025, while iron ore was up 3.01% in the 12 months to December 2025. A surge in the prices of these base metals, especially due to demand from China, has led to a rise in foreign capital flows into Australia. These extra flows also act as an economic stimulus that makes fighting inflation more difficult for the RBA.

Trading the RBA’s Interest Rate Policies

Keeping an eye on the above parameters helps traders make informed forex trading decisions. This is because interest rates directly affect the demand for a currency. The markets tend to price in analyst forecasts and economic data releases. For instance, the AUD/USD surged $0.67 within two days of the release of inflation data. This highlights that your forex trading strategies also need fine-tuning to respond to data releases and interest rate decisions.

Refining Your Forex Trading Strategy

When interest rates rise, demand for the domestic currency surges. This means the AUD/USD could potentially rise in 2026, given that the Federal Reserve (Fed) is eyeing rate cuts. The policy divergence between the RBA and Fed could create a favourable environment for the AUD. However, an AUD surge would make Australian imports costlier for other currencies. This may lower the demand for commodity raw materials, further lowering capital inflows to the nation. This could then exert downward pressure on the currency.

The forecasts are divided, with some suggesting the potential for an AUD/USD surge to 0.70 in Q1 2026 while others expect a decline to 0.63. While volatility creates opportunities, it also increases uncertainty. Derivative instruments, like contracts for difference (CFDs), are a popular choice for forex trading at such times. They allow you to hedge against your long positions with a short position and vice versa to offset the risk of an unfavourable market move. Plus, you can explore opportunities in both the rising and falling markets.

Traders tend to use high-speed trading strategies, such as algorithmic trading, scalping and arbitrage, during market volatility. Through these strategies, they attempt to gain multiple small profits with several positions throughout a trading session.

Technical Indicators for Trading AUD/USD

Technical indicators help you identify entry and exit points as well as determine stop loss and take profit levels in forex trading.

Trend: Moving Average Convergence/Divergence (MACD)

MACD shows the relationship between two exponential moving averages (EMAs) to help traders identify trend direction and momentum shifts. An MACD line crossover above the signal line is considered bullish, especially when it occurs below the zero line.

Momentum: Relative Strength Index (RSI)

RSI measures the speed and amount of change in price movements. Traders determine overbought (above 70) or oversold (below 30) conditions. When RSI exits these extremes, traders consider the market ripe for a reversal. This is when traders riding the trend tend to exit, while those ready for a reversal may enter.

Volatility: Bollinger Bands (BB)

Bollinger Bands form a channel around the price. Traders look for a band squeeze, where the bands are narrow and volatility is low. This is considered an early signal of a price breakout. 

Since no technical indicator is perfect by itself, experienced traders combine signals with market sentiment to make informed forex trading decisions.

To Sum Up

• Three of the four major Australian banks expect the RBA to halt interest rate cuts in 2026.
• Surging inflation and strong job creation data indicate resilient economic growth.
• The markets widely expect AUD volatility to create forex trading opportunities.
• Using technical indicators to trade AUD/USD can help make informed decisions. 
• Using CFDs can help traders exploit opportunities in rising as well as falling markets.

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