Behind the Australian dollar's strong rebound: inflation data surpasses expectations, is the interest rate cut cycle really coming to an end?

The Australian dollar has recently shown a significant upward trend. On November 26, the AUD/USD( rose 0.6% to 0.6505, marking its fourth consecutive day of gains. What signals are hidden behind this rally?

Inflation Data Surpasses Expectations, Central Bank’s Room to Cut Rates Is Limited

The key turning point occurred when Australia released its October CPI data. The figures showed a 3.8% year-over-year increase in the Consumer Price Index, exceeding market expectations of 3.6%. This unexpected result immediately shifted market expectations regarding the Reserve Bank of Australia’s policy direction.

The analysis team at KaiTou Macro pointed out that the latest CPI data reveals a tricky reality: inflationary pressures have not eased significantly. They believe that the probability of the central bank cutting rates in the short term is very low. More importantly, if next week’s national economic accounts)GDP( also show rising capacity pressures, the market’s judgment that the easing cycle has ended will be further confirmed.

Meanwhile, strong U.S. economic data supports the Federal Reserve’s rate cut in December, which further weakens the dollar’s attractiveness and indirectly benefits the Australian dollar’s appreciation.

December Decision Approaching, AUD’s Rise or Fall Depends on Next Year

On December 9, the Reserve Bank of Australia)RBA( will announce its latest interest rate decision. The mainstream market expectation is that the rate will remain unchanged at 3.60%. But the real focus is on the policy direction in 2026.

Regarding the interest rate trajectory next year, opinions in the industry are divided:

The rate hike camp is more vocal. UBS analyst Stephen Wu stated that the current inflation upward momentum is concerning, and consumer prices are likely to remain above the RBA’s target range for the next year. Based on this judgment, he expects the RBA to start raising rates in the last three months of 2026.

Barrenjoey Chief Economist Jo Masters also shares a similar view. Although he admits that the threshold for rate hikes is very high, he believes there is a high probability that the RBA will take action in 2026, because “the final phase of inflation may require more aggressive monetary policy tools.”

Can the Australian dollar become the strongest G-10 currency next year?

Looking at the exchange rate outlook, Francesco Pesole, an analyst at ING Group, offers an optimistic forecast. He believes the Australian dollar is expected to outperform among G-10 currencies in 2026.

His core logic is: assuming the RBA only makes one more rate cut, by the second quarter of 2026, the AUD will have the highest interest rate among G-10 currencies. Coupled with improved trade relations and a positive economic growth outlook, the foundation for the AUD’s appreciation is solid.

Overall, although a rate cut by the RBA in December seems unlikely, market expectations and institutional analyses suggest that the Australian dollar may continue its strength in 2026. The key variables remain whether inflation data can truly return to the central bank’s target range and whether the Federal Reserve’s policy pace continues to slow.