Diverging policies between Australia and the US intensify, with the Australian dollar expected to become a "dark horse" in the G-10

The recent performance of AUD/USD( is worth noting. Since November, this currency pair has risen for four consecutive trading days, with the latest quote breaking through 0.6505, a daily increase of 0.6%. The driving force behind this comes from a significant divergence in monetary policy between Australia and the United States.

Inflation Data Breaks Rate Cut Expectations

Australia’s October CPI rose 3.8% year-on-year, exceeding market expectations of 3.6%. The release of this figure has completely changed market bets on the Reserve Bank of Australia’s (RBA) short-term rate cuts. Capital Economics pointed out that the latest CPI data indicates that inflationary pressures have not been effectively alleviated, and the probability of the central bank initiating rate cuts in the near future has significantly decreased.

More importantly, the GDP data to be released next week will serve as a “touchstone” for judging whether Australia’s easing cycle has truly ended. If this data also shows rising capacity pressures, then Australia’s long-standing rate cut cycle is likely coming to an end.

Federal Reserve’s Stance Becomes Market Focus

Unlike the RBA’s position, the Federal Reserve still has room to cut rates in December. The positive US economic data provides the Fed with reasons to cut rates, which further suppresses the relative attractiveness of the dollar and creates a favorable environment for AUD appreciation. All of this is closely related to new economic policy expectations following the US presidential election.

December Central Bank Decision Imminent

The RBA will announce its latest interest rate decision on December 9. The market widely expects the rate to remain unchanged at 3.60%. However, there are divergences regarding the policy outlook for 2026.

Some institutions believe the RBA still has room to cut rates, but many major banks, led by UBS, predict a possible rate hike in 2026. UBS analyst Stephen Wu pointed out that the current rising inflation trend is concerning, and the consumer price index is likely to continue exceeding the Reserve Bank of Australia’s target range over the next year. He expects the RBA to start raising rates as early as the fourth quarter of 2026.

Barrenjoey Chief Economist Jo Masters was more straightforward: “Although the threshold for rate hikes is very high, given the situation in 2026, the RBA will likely have to act. When inflation enters its final stage, more tightening of monetary policy may be necessary, so I see no path for rate cuts in 2026.”

Can the Australian Dollar Maintain Its Strength?

Analysis from ING suggests that the AUD is expected to perform well among G-10 currencies next year. Francesco Pesole, an analyst at ING, stated that, based on current expectations, the RBA will only cut rates once more in 2026, meaning the Australian dollar will have the most competitive interest rate level among G-10 currencies.

Additionally, improvements in trade relations and positive signals regarding Australia’s economic growth outlook support the upward trend of the AUD. Under the combined influence of these factors, AUD/USD is expected to continue rising around the second quarter of 2026.