The Australian dollar continues to rise: inflation exceeds expectations, breaking rate cut forecasts, and the trend may reverse by 2026

The recent strength of the Australian dollar has invigorated the market. On November 26, AUD/USD closed at 0.6505, up 0.6% for the day, marking four consecutive days of gains. Behind this rally is the market’s reassessment of the Reserve Bank of Australia’s policy cycle.

Inflation Data Shatters Rate Cut Expectations

What truly changed market expectations was the October Consumer Price Index (CPI) data from Australia. The figure increased by 3.8% year-on-year, exceeding the market forecast of 3.6%. Although the difference seems small, it had a significant impact on market sentiment.

Analysts at Capital Economics pointed out that this inflation data sent an important signal — Australia’s inflation pressures have not eased as expected. In this context, the likelihood of the central bank initiating a new round of rate cuts in the short term has greatly diminished. More importantly, if upcoming national economic accounting data (GDP) also shows rising capacity pressures, the entire easing cycle may be over.

RBA Policy at a Crossroads

On December 9, the Reserve Bank of Australia (RBA) is set to announce its latest interest rate decision. The market generally expects rates to remain unchanged at 3.60%. However, the real divergence lies in the policy outlook for 2026.

There is a clear split among institutions regarding next year’s interest rate trajectory. Some believe the RBA still has room to cut rates, but mainstream institutions like UBS have the opposite view — a rate hike cycle may begin in 2026.

UBS analyst Stephen Wu stated that the current rising inflation trend is concerning. He expects the Consumer Price Index to remain above the RBA’s target range over the next year. Based on this, UBS forecasts that the RBA could start raising rates as early as the fourth quarter of 2026.

Jo Masters, Chief Economist at Barrenjoey, expressed a more straightforward view: although the threshold for rate hikes is indeed high, the probability of the RBA taking action in 2026 should not be ignored. He believes that in the final stages of inflation, more tightening of monetary policy may be necessary to fully suppress prices. In other words, there appears to be no path for rate cuts in 2026.

AUD Becomes the New Favorite in Forex Markets

Under these policy expectations, the appeal of the Australian dollar has been reactivated. Francesco Pesole, an analyst at ING, stated that the AUD is expected to be a standout among G-10 currencies in 2026.

His reasoning is that the RBA will only cut rates once more, which means the Australian dollar’s interest rates are likely to become the most competitive among G-10 countries. Coupled with improved trade relations and better growth prospects for Australia, the AUD has considerable upside potential for appreciation next year.

Currently, the market’s expectation of Fed rate cuts provides additional support for the AUD. Strong US economic data has encouraged the Fed to continue cutting rates in December, further weakening the dollar’s attractiveness and highlighting the relative value of the AUD.

In short, the probability of AUD/USD continuing to rise in 2026 is increasing, and market focus has shifted from “Will the RBA cut rates?” to “When will they raise rates?”