Can the AUD exchange rate break through 0.70? Expectations of interest rate hikes by the central bank ignite a rally in 2026

Central Bank Policy Shift, Market Focuses on AUD Appreciation

Market expectations for the Reserve Bank of Australia’s policy are undergoing a crucial change. With the latest economic data released, investors are significantly increasing their bets on the RBA initiating a rate hike cycle in 2026. According to implied probabilities in the currency market, after the household expenditure data exceeded expectations, traders’ optimism about a rate hike in May 2026 surged from 18% to 55%—a sharp reversal of short-term views, reflecting the market’s optimistic outlook on Australia’s economic prospects.

Strong Domestic Demand Boosts Inflation Expectations

Australia’s economic growth momentum remains robust, presenting a policy dilemma for the central bank. The October household expenditure data released on December 4th shocked the market: month-on-month growth reached 1.3%, far exceeding economists’ forecast of 0.6%; year-on-year growth soared to 5.6%, above the expected 4.6%. This strong data directly pushed the yield on 3-year Australian government bonds above 4%, hitting a new high since January this year.

More critically, inflation pressures have not eased as the market anticipated. The Consumer Price Index (CPI) for October rose 3.8% year-on-year, surpassing market expectations, indicating that price upward momentum remains stubborn. Abhijit Surya, a macro analyst at Kantar, bluntly stated that the surge in Australian household spending “eliminates the possibility of the central bank cutting rates further,” and that “the RBA may be forced to tighten policy soon.”

Exchange Rate Mechanism Activated, AUD Outlook Bright

The RBA is scheduled to announce its latest interest rate decision on December 9th. Although three rate cuts have been implemented this year, under the pressure of high inflation, the rate is expected to remain unchanged at 3.6%. The key change is that the market no longer bets on rate cuts but has shifted to expecting a rate hike cycle in 2026. This change in expectations has directly driven up the AUD exchange rate.

According to forecasts from several international financial institutions, the AUD/USD exchange rate trend looks promising: NAB predicts the rate will rise to 0.67 by December 2025 and further to 0.71 by June 2026; Westpac expects the rate to reach 0.69 in March 2026 and possibly rise to 0.71 before the end of the year; ING estimates the AUD could reach 0.68 in the second quarter of 2026 and 0.69 by year-end. While these forecasts differ slightly, the overall direction is highly consistent—the appreciation potential for the AUD has opened up.

Chain Reactions from Exchange Rate Fluctuations

AUD appreciation has a chain reaction effect on the entire forex market. As a major commodity producer and exporter, Australia’s currency often reflects overall risk asset expectations. When the AUD appreciates against the USD, it usually indicates increased market confidence in global growth prospects. At the same time, the AUD’s performance in the RMB market is also noteworthy—an upward trend in the AUD could drive the AUD/CNY exchange rate higher, directly impacting investors involved in Sino-Australian trade.

From a technical perspective, the AUD/USD has broken through a key resistance level. Whether it can break through the 0.70 threshold depends on the tone of the December central bank decision and subsequent inflation data. If inflation remains high in the first half of next year, the signals for further rate hikes from the RBA will become clearer, further boosting the AUD’s valuation.

How Investors Should Position

For investors monitoring the AUD exchange rate, key upcoming events include the RBA’s December 9th rate decision, Q1 2026 CPI data, and the Federal Reserve’s policy moves. Whether the AUD’s upward momentum can be sustained ultimately depends on how global interest rate differentials evolve—if the Fed accelerates rate cuts while the RBA persists in raising rates, the AUD’s appreciation potential will be even greater.