Guus Hiddink was installed as interim manager until the end of the season following the Portuguese boss' December exit and has helped the Stamford Bridge club establish a seven-match unbeaten run.
Hoddle acknowledged the immediate impact the experienced Dutch manager has had on the two Chelsea attackers but feels there is still more to come from the duo, with a difficult trip to Arsenal on Sunday.
"The real test is coming for Chelsea and Guus Hiddink. You could argue there have been some improvements since he took over from Jose Mourinho," Hoddle wrote in the Daily Mail.
"Diego Costa is certainly working harder and getting into dangerous areas, which he didn't appear to be doing under the previous manager.
READ MORE | Hiddink urges Costa to stay angry
"Cesc Fabregas is delivering the ball forward quicker and playing more positively. But it's not exactly been a huge revival.
"To a certain extent it is only what you would expect when a new man comes in. Pretty quickly players settle into the routine of the new manager and that's where Chelsea are now. I believe they could have a decent run in the Champions League.
"At the moment they are making small steps, but Sunday's game may have come a bit too soon for them."
Hoddle has also backed 35-year-old club captain John Terry to be awarded a new contract extension following consistent performances at the heart of the Chelsea defence.
The Premier League champions have lost key dressing room personnel in recent years and Hoddle has urged the club to keep hold of their experienced leader.
"You couldn't put Chelsea's problems this season simply down to the departure of Cech,” Hoddle explained. “It clearly has been a much deeper issue than that. One thing they have certainly lacked is stability and leadership in the dressing room. Losing Cech will have had an impact there.
"In recent years they also lost Didier Drogba and Frank Lampard, and that must be behind the reasoning in trying to bring Didier back as a coach. It is also the reason I wouldn't hesitate to give John Terry a new contract, even at 35.
"He hasn't been as commanding as last season, when he played every minute of every game and was outstanding, but it's not as if he's been any worse than any of the other Chelsea defenders.
"If I were going in there as manager, I'd definitely want John around. Even if he doesn't play every week, you would want his presence in the dressing room. Many Chelsea [players] haven't been at the club too long. For that reason alone, they must keep the captain."