AUD/USD recovers ground towards 0.6700 driven by RBA tightening expectations

The AUD/USD pair continues its rally in Friday’s Asian session, approaching 0.6690 after recovering from the pressures of the previous day. The Australian dollar gains momentum thanks to renewed optimism regarding possible interest rate hikes by the Reserve Bank of Australia.

Australian Inflation in Focus: Key for February Decision

Market attention is centered on the Australian fourth-quarter Consumer Price Index report, scheduled for January 28. An inflation figure above expectations in core inflation could open the door to a rate increase at the RBA meeting on February 3.

Michele Bullock, RBA governor, has previously indicated that although the Board has not explicitly considered a hike at this time, it has evaluated scenarios under which monetary tightening might become necessary during 2026. The central bank’s December minutes revealed that policymakers are willing to act if inflation does not evolve as expected.

Australian Manufacturing Maintains Moderate Pace

The S&P Global Manufacturing Purchasing Managers’ Index stood at 51.6 in December, slightly below the preliminary estimate of 52.2. Although production and new orders remain in expansion territory, growth has slowed compared to previous months.

Diverging Monetary Policies Favor the AUD

The favorable context for the AUD/USD is also fueled by the weakness of the US dollar. Markets estimate that the Federal Reserve could implement two additional rate cuts during 2026, deepening the divergence in monetary trajectories with Australia.

The probability that Donald Trump will appoint a new Fed chair to succeed Jerome Powell when his term ends in May adds uncertainty to US exchange rate policy. The December FOMC minutes suggest that most officials would support further reductions if inflation continues to moderate. However, some members have proposed a pause after the three cuts made in 2025, arguing that it is prudent to keep rates stable while assessing labor market conditions.

This gap between potential Australian tightening and US easing reinforces short-term demand for the AUD/USD, although the Australian CPI result will be decisive in confirming the magnitude of the move.