Will the Australian dollar's outlook continue its upward trend in 2026? Diverging central bank policies may become the key

In 2025, the AUD/USD performed strongly, with a cumulative increase of 7%. Driven by tariff adjustments, a weakening US dollar, and the resilience of the Australian domestic economy, the Australian dollar demonstrated considerable resistance. As we enter 2026, can this upward trend continue? The key will still depend on how the three variables—central bank policies, the domestic economy, and geopolitical factors—interact.

RBA Hawkish Stance vs. Fed Continuing to Easing

The outlook for the Australian dollar primarily depends on the policy directions of the two central banks. The market has already confirmed that the Reserve Bank of Australia (RBA) has ended its rate-cut cycle, but there are differing expectations for rate hikes in 2026.

Institutional forecasts vary. Westpac Bank believes the RBA will remain on hold, while the Commonwealth Bank of Australia predicts one rate hike. Conversely, NAB and Citibank are more hawkish, expecting two rate hikes (in February and May). This policy divergence essentially reflects the rising inflation pressures—Australia needs a firmer tightening stance to stabilize inflation expectations.

In contrast, the Federal Reserve’s path is clearer. The market generally expects the Fed to cut rates twice in 2026, with only JPMorgan’s forecast being relatively conservative, expecting just one rate cut. Regardless of the scenario, the divergence between the Fed’s easing cycle and the RBA’s tightening stance constitutes a clear bullish factor for the AUD exchange rate.

Can Australia’s Economic Resilience Support the AUD Outlook?

Economic fundamentals are an important reference for assessing the AUD outlook. In 2025, Australia’s GDP growth exceeded expectations, and the unemployment rate remained stable, indicating economic resilience. The OECD forecasts that Australia’s GDP growth will reach 2.3% in 2026, higher than in 2025, reaffirming the growth momentum.

Interestingly, although Australia’s economy is growing steadily, it is highly dependent on commodity exports, with China being its largest trading partner. This hidden risk means that if China’s economic growth slows more than expected in 2026, Australian exports could face pressure, dimming GDP growth prospects and subsequently weighing on the AUD.

Geopolitical Factors as Uncertain Elements for the AUD

The AUD is a typical risk asset, and changes in global risk appetite directly impact its valuation. When risk appetite rises, the AUD benefits; when risk aversion increases, the AUD tends to be sold off.

Potential black swan events in 2026 include: a possible trade war initiated by US President Trump, escalation of Middle Eastern geopolitical conflicts, or other sudden political risks. Once triggered, these factors could lower risk appetite and exert sustained pressure on the AUD/USD.

How Major Institutions View the AUD Outlook

Overall, market sentiment towards the AUD remains optimistic. JPMorgan expects the AUD/USD to reach 0.67 in Q1 2026 and rise to 0.68 by year-end. Deutsche Bank is even more bullish, believing the AUD’s interest rate advantage among G10 currencies will widen, with forecasts of 0.69 in Q2 and 0.71 by year-end. NAB’s predictions are the most aggressive, expecting the pair to rise to 0.71 in Q2 and 0.72 in Q3.

The common logic behind these forecasts is that the RBA’s interest rate advantage (relative to the Fed’s easing cycle) and Australia’s relative economic strength will support the AUD.

Key Focus Points for the AUD Outlook in 2026

The upside potential for the AUD mainly stems from policy divergence among central banks, while risks include China’s economic slowdown and worsening geopolitical tensions. From a technical perspective, whether AUD/USD can break through 0.70 will be a crucial threshold in 2026—breaking above would indicate sustained improvement in risk appetite and strong fundamentals; failing to do so suggests that risk events have already impacted market sentiment. Investors should monitor central bank meetings, Chinese economic data, and geopolitical news to identify trading opportunities for the AUD outlook.