The Australian interest rate hike cycle is approaching, and the Australian dollar has already priced in market expectations in advance.

The upward trend of the Australian dollar against the US dollar is becoming more evident, driven by market expectations of a policy shift by the Reserve Bank of Australia. As economic fundamentals remain strong and inflation pressures exceed expectations, the currency market has begun pricing in a rate hike cycle as early as 2026.

Strong Economic Data Leaves Little Room for RBA Rate Cuts

The October household expenditure data released by the Australian Bureau of Statistics on December 4 became a key turning point. The data showed a month-on-month increase of 1.3%, far exceeding the market expectation of 0.6%; year-on-year growth of 5.6%, also higher than the expected 4.6%. This robust domestic demand dispelled market concerns about an economic slowdown and effectively eliminated the possibility of further rate cuts by the Reserve Bank of Australia.

What’s more notable is that the October Consumer Price Index (CPI) increased by 3.8% year-on-year, surpassing market expectations. Abhijit Surya, a macroeconomist at Capital Economics, stated that the surge in Australian household spending has fully demonstrated that the central bank does not need to adopt further easing policies. He further warned that if there is any risk, it is that the RBA might soon face a situation where policy tightening becomes necessary.

Market Clearly Bets on a Rate Hike Timeline

The Reserve Bank of Australia will announce its latest interest rate decision on December 9, with the market generally expecting the rate to remain unchanged at 3.6%. However, focus has shifted to a longer-term horizon—the 2026 rate hike cycle.

Following the release of household expenditure data, the probability of a rate increase in May 2026 in the futures market surged from 18% three weeks ago to 55%. This rapid shift in expectations has directly driven the AUD/USD exchange rate to a more than one-month high, currently at 0.6615 at the time of writing. Meanwhile, the yield on the 3-year Australian government bond also broke through 4%, reaching a new high since January of this year.

AUD Outlook: Banks Optimistic About Appreciation Potential

Several financial institutions are optimistic about the future trend of the Australian dollar, generally expecting significant appreciation within 2026.

National Australia Bank (NAB) forecasts that the AUD/USD exchange rate will reach 0.67 by December 2025, and then rise to 0.71 by June 2026. Westpac Bank expects the AUD/USD to hit 0.69 in March 2026, further rising to 0.70 in September, and ultimately reaching 0.71 by December 2026. ING Group’s forecast is relatively conservative, expecting the AUD/USD to rise to 0.68 in the second quarter of 2026, and then reach 0.69 by the end of the year.

Although forecasts vary slightly among institutions, the overall direction is appreciation, reflecting the market’s high confidence in the RBA’s rate hike cycle and the attractiveness of the Australian dollar as a carry trade asset.