Can AUD/USD break through 0.7? Rate hike expectations in 2026 are pushing up the exchange rate.

The Reserve Bank of Australia policy shift becomes the market focus. As household expenditure data far exceeds expectations, the market is re-evaluating Australia’s economic outlook, with expectations for rate hikes in 2026 rapidly heating up.

Household Spending Data Refreshes Expectations, Inflationary Pressures Highlighted

Australia’s October consumption data now “exceeds expectations,” with official statistics showing household spending increased by 1.3% month-on-month, more than double the expected 0.6%. Year-over-year growth also reached 5.6%, well above the expected 4.4%. This data prompts the market to reconsider the true state of the Australian economy—domestic demand remains robust and has not weakened due to the central bank’s rate cuts.

More notably, inflation dynamics are worth attention. Australia’s October CPI year-over-year growth reached 3.8%, surpassing market expectations, indicating that price increases remain strong. This inflation stickiness severely constrains the Reserve Bank of Australia’s policy space. The combination of strong consumption and high inflation is rewriting market judgments about the RBA’s future direction.

Rate Hike Pricing Reverses, Market Expectations Surge

Following the release of consumption data, the probability of the RBA raising rates in May 2026 has surged from previous levels of 18% to 55%, marking a dramatic shift. Although the RBA has already cut rates three times this year, the emergence of inflationary pressures and robust consumption have essentially eliminated room for further easing.

The RBA is scheduled to announce its latest interest rate decision on December 9. The market widely expects the benchmark rate to remain unchanged at 3.6%, which would send a clear signal—the rate cut cycle has ended. Investors are preparing for the upcoming rate hike cycle.

Australian Dollar Rally Becomes Consensus, but Limited Room

The policy shift by the RBA has directly boosted the AUD/USD exchange rate. National Australia Bank forecasts that the AUD/USD will reach 0.67 by December 2025, and potentially rise to 0.71 by June 2026. Westpac’s outlook is slightly more conservative, expecting 0.69 by March 2026, rising to 0.70 in September, and reaching 0.71 by year-end. ING Group believes it could rise to 0.68 in Q2 2026 and 0.69 by the end of the year.

While forecasts differ among the three institutions, they all point in the same direction—the AUD/USD will break through 0.70 in 2026. Expectations of rate hikes are the core driver of the Australian dollar’s rise, with higher interest rates attracting international capital inflows into Australia, pushing up the AUD. In contrast, currencies like the RMB are relatively pressured under the uncertainty of Federal Reserve policies.

Future Trends Face Two Major Considerations

The future performance of the AUD depends on two factors: first, whether the RBA will truly start raising rates in 2026; second, whether global risk assets remain strong. If rate hike expectations are confirmed, the AUD is likely to test levels of 0.71 and above. However, if global economic growth slows or the Fed unexpectedly cuts rates, the upside for the AUD may be limited.

For investors tracking the Australian dollar, the next three months are critical—December’s RBA decision, January’s US inflation data, and February’s Australian employment data will all be important references for pricing the AUD’s future trajectory.