Inflation remains high, and expectations of interest rate hikes in Australia are emerging. The Australian dollar is expected to rebound in 2026.

Australia’s latest economic data is rewriting market expectations for the central bank’s monetary policy. As inflationary pressures show no signs of easing, the likelihood of Australia raising interest rates is increasing. How will this affect the Australian dollar’s trend?

Inflation Surpasses Expectations, End of Rate Cut Cycle

On November 26, AUD/USD rose 0.6% to 0.6505, marking the fourth consecutive day of gains. The market’s shift was driven by the surprise October CPI data from Australia—an annual increase of 3.8%, exceeding the market expectation of 3.6%. This figure directly dampened investors’ expectations of the Reserve Bank of Australia (RBA) continuing to cut rates.

Citi Macro analysts pointed out that the latest price index indicates little sign of inflation pressure easing, and the central bank has very limited room to initiate a new rate cut in the short term. If next week’s national economic accounts data also confirm rising capacity pressures, the long-standing easing policy cycle relied upon by the market may have already ended.

In contrast, US economic data has been favorable for the Federal Reserve’s December rate cut decision, further weakening the dollar’s attractiveness and indirectly boosting the Australian dollar’s relative performance.

Institutional Divergence: Rate Hike Expectations Are Taking Shape

On December 9, the RBA will announce its latest interest rate decision, with a consensus that rates will remain at 3.60% in December. However, opinions among institutions about the policy direction in 2026 are divided.

UBS analyst Stephen Wu believes the situation has changed. He states that the current rising inflation trend is concerning, and the consumer price index is likely to remain above the RBA’s target range over the next year. Based on this judgment, UBS forecasts that the RBA will start raising rates in Q4 2026.

Jo Masters, Chief Economist at Barrenjoey, is more direct: “While the hurdle for rate hikes is very high, the RBA is likely to act in 2026. The final stages of inflation may require tighter monetary policy, and we see no path for rate cuts in 2026.”

In contrast, some institutions still see the possibility of rate cuts by the RBA, but the emergence of rate hike expectations itself signifies a major shift in policy outlook.

Under the Background of Australia’s Rate Hike, the AUD Is Expected to Lead G-10 Gains

Francesco Pesole, an analyst at ING, stated that the Australian dollar is becoming the most attractive choice among G-10 currencies for next year.

Pesole pointed out that the RBA expects to need only one rate cut in the future, which means that by Q2 2026, Australia is likely to have the highest interest rate among the G-10 group. Additionally, considering the improving trade relations, Australia’s economic growth prospects appear quite positive.

Against the backdrop of the formal emergence of rate hike expectations in Australia, the probability of continued gains in AUD/USD is not low. The market is adjusting its pricing for a new policy cycle.