## The Australian Dollar Strengthens as Inflation Pressure Breaks Rate Cut Expectations

AUD/USD recently broke above 0.6505, marking four consecutive days of gains. The logic behind this seems simple, but it has triggered a major shift in global central bank policies.

### Unexpected Inflation Rise Ends RBA Rate Cut Cycle

November data has completely changed market dynamics. Australia's October CPI year-over-year rose to 3.8%, higher than the market expectation of 3.6%. The message from this data is clear — inflation has not eased as expected and is showing signs of rebound.

Citi Macro analysts pointed out that the latest price data indicates little room for easing pressures, and the probability of the central bank adopting an easing policy in the short term has significantly decreased. More importantly, if upcoming GDP data also confirms that the output gap still exists, the entire easing cycle may be over.

The Reserve Bank of Australia (RBA) is set to hold its interest rate decision in December, with the consensus expecting to keep the benchmark rate unchanged at 3.60%, a stark contrast to previous expectations of rate cuts.

### Turning Point in 2026: Central Banks Hold Divergent Views

There is a clear divergence within the industry regarding policy directions next year. Some believe the RBA still has room to cut rates, but authoritative institutions like UBS and Barrenjoey have taken more aggressive stances.

UBS analyst Stephen Wu said that the current inflation momentum is concerning, and he expects the consumer price index to remain above the Reserve Bank's target range over the next 12 months. Based on this, UBS predicts the RBA will start a rate hike cycle in the last quarter of 2026.

Barrenjoey Chief Economist Jo Masters was more straightforward: "Although the hurdle for rate hikes is very high, there is a strong likelihood that the RBA will act in 2026. Especially in the final stages of inflation, tighter policies may be necessary, and there is currently no sign of rate cuts."

### Weakening US Dollar Supports Australian Dollar Strength

Meanwhile, US economic data released positive signals, supporting the Fed's decision to cut rates in December. Under the pressure on the dollar, the relative strength of the AUD has become more evident. This also explains why AUD/USD rose 0.6% last week.

### The AUD Could Become a Strong Currency in 2026

ING analyst Francesco Pesole is quite optimistic about the AUD's outlook, believing it will be one of the best-performing G-10 currencies next year.

Pesole pointed out that based on their expectations of the RBA's policy, they believe the bank will only implement one more rate cut, meaning by the second quarter of 2026, the AUD will have the highest interest rate among G-10 currencies. Coupled with improved trade relations and a positive economic growth outlook, the case for AUD appreciation is solidified.

The unexpected end of the RBA's rate cut cycle is reshaping the global forex landscape. Market sentiment towards the AUD has shifted from previous depreciation expectations to a re-pricing of it as a high-yield asset.