Will the Australian dollar trend upward in the future? The market bets on the start of the 2026 interest rate hike cycle.

Australia’s economy, driven by strong domestic demand and persistent inflation, is rewriting market expectations for monetary policy. Investors are generally optimistic about the Australian dollar’s future trend, with the AUD/USD potentially appreciating significantly over the next year. According to the latest bets in the currency markets, the Reserve Bank of Australia (RBA) is very likely to start a rate hike cycle in the first half of 2026.

Economic Resilience Surpasses Expectations; Central Bank’s Easing Cycle to End

In early December, the Australian Bureau of Statistics released October household expenditure data, surpassing market expectations—monthly increase of 1.3%, well above the forecasted 0.6%; annual growth reached 5.6%, significantly higher than the 4.6% estimate. This data sends a strong signal: Australia’s consumer market remains hot, and domestic demand momentum has not weakened.

This was followed by a chain reaction in financial markets. The yield on 3-year Australian government bonds broke through 4%, reaching a new high for the year. Economists generally believe that this robust household spending indicates the RBA has little room to cut rates further, making additional easing policies almost impossible.

Abhijit Surya, a macroeconomist at Capital Economics, bluntly stated: “The surge in household spending in October confirms that the RBA will not cut rates further. If there is any risk, it’s that the central bank may soon be forced to tighten policy further.” This comment reflects market concerns about a policy shift.

Rate Hike Expectations Rise; Forex Market Reacts Sharply

Inflationary pressures have never truly subsided. Australia’s October Consumer Price Index (CPI) rose 3.8% year-over-year, exceeding market expectations and clearly indicating that price increases are not effectively contained. This “dual high” scenario of rising prices and strong domestic demand makes the RBA’s next policy move highly constrained.

At the December rate decision meeting, despite implementing three rate cuts this year, the RBA decided to keep rates steady at 3.6%, amid rising inflation pressures. More importantly, expectations for rate hikes have become a hot topic. After the household expenditure data was released, the probability of a rate hike in May 2026 surged from 18% the previous day to 55%, more than tripling.

This rapid increase in expectations directly impacted the forex market. The AUD/USD pair extended its rally, reaching a new high in over a month, peaking at 0.6615 in early December. The market is clearly pricing in the start of a rate hike cycle.

Major Banks’ Forecasts for AUD/USD Path

Various leading financial institutions worldwide have provided their outlooks for the Australian dollar’s future.

National Australia Bank (NAB) expects AUD/USD to reach 0.67 in early 2026, then rise to 0.71 by mid-2026.

Westpac’s forecast is more progressive. The bank predicts AUD/USD will hit 0.69 by March 2026, rise to 0.70 by late spring or early summer, and further climb to 0.71 before the end of the year, showing a steady upward trend.

ING Group’s outlook is relatively conservative but aligned. They believe AUD/USD will reach 0.68 in the second quarter of 2026, then increase to 0.69 by year-end.

Although these three institutions have slight differences in specific targets, their overall outlook for appreciation is highly consistent—pointing toward a clear expectation of AUD strengthening.

Key Variables for the AUD’s Future Trajectory

Whether the RBA’s rate hike cycle truly begins in the first half of 2026 depends on inflation trends and employment market performance. If inflation remains high, the central bank will have no choice but to tighten further; if inflation effectively recedes, the timing of rate hikes could be delayed. Additionally, global geopolitical and economic developments, as well as the strength of the US dollar, will significantly influence the AUD’s potential for appreciation. Investors should closely monitor these macro indicators.