Australian dollar exchange rate support factors emerge, 2026 rate hike expectations boost appreciation potential

Recently, the Australian dollar has performed strongly, backed by market expectations of a policy shift by the Reserve Bank of Australia. As inflation pressures become evident and domestic demand continues to grow, the currency market is beginning to price in a rate hike cycle in 2026, reshaping the investment logic for the AUD.

Strong Domestic Demand Breaks Expectations of Rate Cut Cycle

Data released by the Australian Bureau of Statistics in early December shattered the market’s hopes for a rate cut. In October, household spending increased by 1.3% month-on-month, far exceeding the market expectation of 0.6%, with a year-on-year increase of 5.6%, surpassing the expected 4.6%. This data indicates that Australian household consumption has not weakened as anticipated but is instead accelerating.

Citi macro analyst Abhijit Surya immediately pointed out that strong household expenditure data has completely changed the market’s view of the Reserve Bank of Australia. He emphasized that if the RBA intends to maintain easing, these data will be a major obstacle. More importantly, it could mean that policy will face tightening pressures sooner.

Inflation Signals and Policy Turning Point

Another factor supporting the AUD exchange rate is the persistent inflation pressure. Australia’s October Consumer Price Index (CPI) rose by 3.8% year-on-year, again exceeding market expectations, indicating that price pressures have not been effectively contained after multiple rate cuts by the central bank.

Although the RBA has cut rates three times in 2025, the market generally expects rates to remain unchanged at the December 9 meeting amid still-high inflation. The key shift occurred after the household expenditure data was released—Australian 3-year government bond yields directly broke through 4%, reaching a new high since January this year, sending a clear policy signal to the market.

Market Pricing in 2026 Rate Hike Window

The surge in Australian bond yields reflects a rapid adjustment in expectations for rate hikes. Before the household expenditure data was released, the market’s probability of a rate increase by May 2026 was only 18%. After the release, this probability soared to 55%, a swift change that fully reflects traders’ reassessment of the policy path.

The AUD/USD exchange rate subsequently rose, with the three major institutions offering different forecasts: National Australia Bank expects the AUD to reach 0.67 by the end of 2025 and rise to 0.71 by June 2026; Westpac Bank forecasts it will reach 0.70 in Q3 2026; and ING Group remains relatively conservative, predicting 0.69 by the end of 2026.

Reshaping the Investment Logic of the AUD Exchange Rate

This series of changes indicates a fundamental shift in the supporting logic of the AUD exchange rate—from the previous “rate cut-driven decline” to “rate hike expectations pushing higher.” Strong domestic demand, inflation above expectations, and clear policy shift signals are collectively driving the future direction of the AUD higher.

For investors, the key is to observe the RBA’s December decision and subsequent policy communications. If inflation pressures persist and rate hike expectations further strengthen, the AUD’s upward momentum could continue to ferment.