Is there a turning point in the AUD trend? With interest rate hike expectations coming one after another, will 2026 become the year the Reserve Bank of Australia shifts its stance?

Persistently high inflation data has become the underlying driver behind the Australian dollar’s strong appreciation. On November 26, AUD/USD quoted at 0.6505, up 0.6% for the day, marking the fourth consecutive trading day of gains. Behind this upward trend, Australia’s October CPI year-over-year increase of 3.8% played a significant role—this figure exceeded market expectations of 3.6%.

Inflationary pressures show no signs of easing, which suggests that the Reserve Bank of Australia’s (RBA) rate cut window may have closed. CICC Macro analysis pointed out that the latest CPI data indicates that inflation momentum has not shown a clear retreat, making it highly unlikely for the central bank to cut rates again in the short term. If next week’s release of the National Accounts (GDP) data also confirms rising capacity pressures, the easing cycle is likely over.

Meanwhile, the Federal Reserve continues to push forward with rate cuts. Recent US economic data have performed well, reinforcing expectations of a December rate cut by the Fed, further weakening the US dollar. Market expectations suggest that the policy divergence between the RBA and the Fed will become more pronounced by 2026— the former may raise rates, while the latter continues to ease. This divergence in central bank policies is expected to sustain the upward momentum of the AUD/USD exchange rate.

Signs of a Policy Shift by the RBA Are Becoming More Apparent

On December 9, the RBA will announce its latest interest rate decision, with the market generally expecting rates to remain unchanged at 3.60%. However, opinions among institutions are diverging regarding the policy direction in 2026.

UBS analyst Stephen Wu believes that the current rising inflation trend is becoming increasingly evident, and the Consumer Price Index is likely to remain above the RBA’s target range for the next year. Based on this, UBS forecasts that the RBA will start raising rates in Q4 2026. Barrenjoey Chief Economist Jo Masters stated that although the threshold for rate hikes is very high, the probability of the central bank taking action in 2026 is not zero— the final stages of inflation may require more tightening monetary policy tools.

Could the AUD Become the Biggest Winner in the Forex Market Next Year?

ING analyst Francesco Pesole expressed optimism about the AUD’s relative performance among G-10 currencies. The institution expects the RBA to raise rates only once in 2026, which would mean the AUD will have the highest interest rate among G-10 currencies by Q2 2026. Coupled with optimistic growth prospects from improved Australia trade relations, the AUD is poised to be the strongest performer among major developed country currencies next year.

Based on the views of various institutions, the inflation pressures faced by the AUD and the expectations of a policy shift by the central bank have become core factors supporting its exchange rate, while the ongoing rate cuts by the Fed will further enhance the attractiveness of the AUD.