The Australian dollar is strengthening rapidly! The market is wildly betting on a rate hike in 2026. Is there still room for further appreciation?

Australian economic data continues to send strong signals, driving the Australian dollar exchange rate to regain strength. As inflationary pressures remain difficult to ease and domestic demand performs better than expected, investors are increasingly betting on the Reserve Bank of Australia (RBA) to start raising interest rates earlier, which has also boosted the AUD/USD exchange rate.

Domestic demand data exceeds expectations, inflationary pressures persist

The reason why the Australian economy continues to attract market attention lies in its resilient fundamentals. October household expenditure data is a clear signal—monthly increase of 1.3%, far exceeding the market expectation of 0.6%; annual growth is as high as 5.6%, also significantly above the expected 4.6%. This set of data indicates that Australian household consumption momentum remains sufficient.

Meanwhile, inflation issues show no obvious signs of easing. The Consumer Price Index (CPI) for October rose by 3.8% year-on-year, also surpassing market expectations, which means the tightening pressure faced by the RBA is increasing. Abhijit Surya, an economist at Capital Economics, stated that this household expenditure data confirms that the RBA will not continue to cut interest rates and may be forced to tighten policy more quickly.

AUD exchange rate rises in response, hitting multi-month highs

Market reactions to these data are very swift. The yield on 3-year Australian government bonds broke through the 4% mark, reaching its highest level since January this year. Driven by this, the AUD/USD exchange rate strengthened, with the latest quote at 0.6615, hitting a high not seen in over a month.

This appreciation trend is backed by the market’s re-pricing of the RBA’s policy stance. Investors are adjusting their previous expectations of continued rate cuts by the RBA and are preparing for the possibility of rate hikes.

Rate hike expectations heat up, markets start pricing in 2026 action

The most notable point is the aggressive betting in the currency market on the timing of the RBA’s rate hikes. Before the household expenditure data was released, the market’s probability of a rate increase in May 2026 was only 18%, but it then surged to 55%, a significant increase indicating a rapid shift in market sentiment.

The RBA is scheduled to announce its latest interest rate decision on December 9. Although the bank has already implemented three rate cuts this year, considering the rising inflation pressures, it is expected to keep the benchmark rate unchanged at 3.6%, without further easing for now.

Multiple institutions are optimistic about AUD appreciation, but with differing magnitude estimates

Regarding the medium-term outlook for the AUD/USD, mainstream institutions have already provided relatively optimistic forecasts. NAB (National Australia Bank) expects the AUD to reach 0.67 by December 2025, then further rise to 0.71 by June 2026. Westpac’s forecast is somewhat more cautious, expecting 0.69 in March 2026, rising to 0.70 in September, and reaching 0.71 by the end of the year. ING’s medium-term forecast falls between the two, expecting 0.68 in Q2 2026 and 0.69 by year-end.

Overall, the market consensus on the AUD’s appreciation direction has formed, but there are some differences in the estimates of the magnitude. The key will still depend on the signals from the December RBA meeting and the trajectory of inflation data in the coming months.