Inflation continues to rise, the Australian dollar exchange rate faces a turning point

Australia’s latest economic data shows that inflationary pressures are far from easing, which has a profound impact on the outlook for the Australian dollar exchange rate. Francesco Pesole, an analyst at ING, pointed out that the Australian dollar is expected to become the strongest performer among G-10 currencies in 2026, mainly due to a potential shift in the Reserve Bank of Australia’s (RBA) interest rate policy.

The Underlying Reasons for the Recent Rise in the AUD Exchange Rate

On November 26, the AUD/USD closed at 0.6505, marking the fourth consecutive day of gains with a daily increase of 0.6%. Two forces are driving this upward momentum: on one hand, Australia’s October Consumer Price Index (CPI) rose by 3.8% year-over-year, well above the market expectation of 3.6%; on the other hand, strong US economic data supported the Federal Reserve’s decision to cut interest rates in December, putting pressure on the US dollar.

Market judgments that the RBA’s rate-cut cycle has ended are becoming increasingly clear. According to the latest assessment from Capital Economics, inflation remains high with little sign of retreat, and the likelihood of the central bank adopting an easing policy in the short term is minimal. If next week’s release of gross domestic product (GDP) data also reflects capacity constraints, the RBA’s rate-cut cycle is likely to be definitively over.

The RBA’s Policy Crossroads

The RBA will announce its latest interest rate decision on December 9, with the market widely expecting rates to remain unchanged at 3.60%. But what truly draws attention is the policy direction for 2026.

Currently, there are clear disagreements among institutions. Some analysts still believe the RBA might continue to cut rates, but major institutions like UBS are signaling a completely different outlook—they predict that the RBA could initiate a rate-hiking cycle in 2026. UBS analyst Stephen Wu stated that the rising inflation trend is concerning, and the consumer price index is likely to remain above the RBA’s target range over the next 12 months, with rate hikes most likely occurring in the fourth quarter of 2026.

Jo Masters, Chief Economist at Barrenjoey, is more direct: although the threshold for raising rates is very high, the probability of the RBA taking such action in 2026 is increasing. He pointed out that the final stages of inflation are likely to require more aggressive monetary tightening, and in such a scenario, rate cuts would be out of the question.

The Upward Channel for the AUD Has Taken Shape

Based on the judgment of a policy shift by the RBA, multiple institutions are optimistic about the future of the AUD exchange rate. Francesco Pesole believes that, especially considering the gradual improvement in trade relations and the relatively positive economic growth outlook for Australia, the AUD is expected to become the currency with the highest interest rate premium among G-10 currencies in the second quarter of 2026, due to the RBA’s expectation of only one rate cut.

This outlook suggests that the upward trend of the AUD/USD could persist throughout 2026. In stark contrast to the Fed’s continued rate cut expectations, the shift in the RBA’s policy from easing to maintaining or raising rates will be the key driver supporting the AUD’s continued appreciation.