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Policy Divergence Drives Early-February FX

A Report by CYS Global Remit Counterparty Sales & Alliance Unit


AUD and EUR Take Centre Stage as Policy Divergence Drives Early-February FX 

Early February FX trading has been defined not by speculative momentum, but by clear monetary policy signals and relative credibility. Two currencies have stood out across non-speculative coverage and institutional commentary: the Australian dollar, following a decisive rate hike by the Reserve Bank of Australia (RBA), and the euro, which continues to grind toward multi-year highs against the US dollar on sustained policy divergence. Together, they illustrate how FX markets in 2026 are once again pricing rates, growth, and credibility over narrative noise.

 

Australian Dollar: RBA Reasserts Inflation Discipline

The Australian dollar has emerged as the strongest G10 performer in early February after the RBA raised its cash rate by 25 basis points to 3.85%, marking its first hike in two years. The decision followed a meaningful upside surprise in inflation, with headline CPI accelerating to approximately 3.8% year-on-year in December 2025, undermining the Bank’s prior assumption that disinflation was firmly back on track.


Importantly, the RBA framed the move as a fundamentals-driven recalibration, not a pre-set tightening cycle. The accompanying statement highlighted stronger-than-expected private demand, a labour market that remains “a little tight,” and inflation pressures that are now projected to return to target only in 2027, rather than earlier forecasts. Governor Michele Bullock reinforced this message by stressing that while further hikes are not guaranteed, they “cannot be ruled out” should inflation prove more persistent. That conditional language has left markets pricing a mildly hawkish bias, restoring two-way risk to Australian rates after a prolonged pause.


FX markets responded swiftly. AUD/USD had entered the week on a softer footing, dipping to an intraday low near 0.6909, weighed down by weakness in commodities such as copper and precious metals. Once the RBA decision was announced, the pair reversed sharply, reclaiming the 0.7000 handle and pushing into territory that several banks describe as multi-year resistance. The speed and conviction of the move underscored how under-positioned markets were for an RBA hike, and how quickly yield support can reprice currencies when policy credibility is re-established.


Sell-side research has been quick to frame the rally as more than a short-term squeeze. Several desks have reiterated or upgraded long-AUD strategies, particularly against lower-yielding or policy-ambiguous counterparts such as GBP. The logic is straightforward: Australia now offers higher carry, a central bank visibly prioritising inflation control, and an economy that—while slowing at the margin—remains far from recessionary conditions.


Domestic implications are also being closely watched, but again through a fundamentally grounded lens. Roughly one-third of Australian households carry mortgages, many on variable rates, implying an increase of around AUD 90 per month on a AUD 600,000 loan following the hike. This is expected to gradually temper discretionary consumption, supporting the RBA’s objective of cooling demand without engineering a sharp downturn. At the same time, a firmer Australian dollar and tighter policy stance should help suppress imported inflation over coming quarters. For FX markets, the takeaway is clear: AUD strength is being underwritten by rates, credibility, and relative growth resilience, rather than speculative enthusiasm.


Euro: Policy Divergence Keeps EUR/USD Pressing Higher

While the Australian dollar has provided the clearest event-driven catalyst, the euro remains central to the broader G10 FX narrative. EUR/USD continues to trade near its strongest levels in several years, extending gains that began in 2025 and carrying into early 2026 on sustained monetary policy divergence. After appreciating by roughly 13–14% over 2025, the pair ended last year around 1.17–1.18 and has since edged higher, trading near 1.1830 and repeatedly testing the psychologically important 1.20 area. Unlike past euro rallies driven by sentiment or positioning, the current move is rooted firmly in relative policy expectations.


The European Central Bank has already delivered 200 basis points of cumulative easing over 2024–25, bringing the deposit rate to approximately 2.00%. With no January meeting and consistent messaging that policy is now appropriately calibrated, the ECB has effectively moved into a wait-and-observe phase, allowing earlier easing to transmit through the economy. In parallel, the ECB continues quantitative tightening, reinforcing the perception that euro-area policy is stable rather than drifting looser.


In contrast, the US Federal Reserve is expected to continue cutting rates gradually through 2026, but without signalling an aggressive pivot. This configuration—US yields slowly drifting lower while euro-area policy appears comparatively steady—has created a structural tailwind for EUR/USD. The result has been a measured grind higher, rather than a disorderly breakout.


Forecast houses increasingly converge on a 1.18–1.22 trading range for EUR/USD this year, with average projections clustering around 1.19–1.21 and year-end targets near 1.20. More constructive scenarios see scope for 1.24–1.26 if the Fed eases more than currently priced and euro-area growth holds up, while downside cases concentrate in the 1.12–1.16 region should US policy remain relatively hawkish or European data disappoint. Short-term quantitative models for February point to an average near 1.2050, with typical intra-month volatility spanning roughly 1.18 to 1.21.


Beyond rates, institutional commentary has highlighted a gradual structural shift in reserve management. The euro’s share of global reserves increased in 2025, driven not only by valuation effects but also by diversification away from perceived excesses in gold and concerns over US policy unpredictability. While extreme upside scenarios—such as EUR/USD approaching 1.30 on political or policy shocks in Washington—remain tail risks rather than base cases, they underscore how asymmetries have shifted in favour of the euro.


Conclusion: Fundamentals, Not Frenzy

Taken together, early-February FX developments reinforce a broader theme in 2026 markets: currencies are moving on policy, not persuasion. The Australian dollar’s strength reflects a tangible shift in domestic monetary policy and renewed inflation discipline, while the euro’s advance is driven by the slow mechanics of policy divergence and portfolio re-allocation. For traders and investors alike, the message is consistent—macro fundamentals and central bank credibility are once again setting the tone across G10 FX.


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