Australian dollar hits new high! Inflation remains high, and interest rate hike expectations are quietly shifting

The Australian dollar rebound momentum remains strong. On November 26, AUD/USD broke through the 0.6505 level, rising 0.6%, and has increased for four consecutive trading days. Behind this rally is a profound market adjustment in expectations for the Australian economy and central bank policies.

Inflation data exceeds expectations, rate cut expectations fall short

Australia’s October Consumer Price Index (CPI) increased by 3.8% year-on-year, higher than the market forecast of 3.6%. This figure shattered the market’s optimistic view of a gradual decline in inflation. Capital Economics pointed out that the latest CPI indicates that inflationary pressures have hardly eased, and the possibility of a rate cut being included in the central bank’s agenda in the short term is very low.

Next week’s release of the National Accounts data (GDP) will be crucial. If GDP also reflects rising capacity pressures, then the easing cycle of the Reserve Bank of Australia (RBA) is likely over. In the December 9 rate decision, the market almost unanimously expects the RBA to keep interest rates unchanged at 3.60%.

Shift in institutional outlook: turning to rate hikes in 2026?

Regarding the interest rate trend for next year, major institutions are divided. UBS analyst Stephen Wu believes that the upward trend in inflation is becoming more evident, and the Consumer Price Index is likely to remain above the RBA’s target range. He predicts that the RBA will raise interest rates in the fourth quarter of 2026.

Barrenjoey Chief Economist Jo Masters also stated that although the threshold for rate hikes is extremely high, the RBA is very likely to take action in 2026. She pointed out, “The final stages of inflation may require more tightening of monetary policy, and there is no clear path to rate cuts in 2026.”

Australian dollar rebound expected to continue into next year

Meanwhile, the Federal Reserve will continue to cut rates, further suppressing the US dollar’s trend. This creates a favorable exchange rate environment for the AUD.

ING analyst Francesco Pesole is optimistic about the Australian dollar’s prospects, believing it could become a standout among G-10 currencies in 2026. “By the second quarter of 2026, the AUD will have the highest interest rate in G-10, as we expect the RBA to cut rates only once more,” he added. Considering the improved trade relations and the relatively positive growth outlook for Australia, this will further support the AUD rebound.

It is expected that the AUD/USD will continue to rise significantly in 2026, and the rebound cycle for the Australian dollar is likely to persist.