The Australian dollar's rally shows no signs of stopping! As expectations for the central bank to raise interest rates intensify, is there still room for the exchange rate to rise?

The resilience of the Australian economy is driving a re-pricing in the currency markets. Recent data shows the AUD/USD pair continuing to rise, supported by market expectations of a shift in the Reserve Bank of Australia’s policy stance.

Household Spending Surprises with Strength, Inflation Pressure Shows No Sign of Retreat

Data released on December 4th lifted market sentiment—Australian household spending in October increased by 1.3% month-on-month, well above the expected 0.6%, with year-on-year growth reaching 5.6%, far exceeding the 4.6% forecast. This set of data demonstrates that consumer activity in Australia remains vigorous.

Almost simultaneously, Australia’s October Consumer Price Index (CPI) rose by 3.8% year-on-year, again surpassing expectations, indicating that inflation has not eased as hoped by the market. The persistent strength of domestic demand combined with high price levels leaves the Reserve Bank of Australia with limited room for maneuver.

Driven by these two strong data points, the yield on the 3-year Australian government bond broke through 4%, reaching its highest level since the beginning of the year. This change reflects investor optimism about Australia’s interest rate outlook.

Market Repricing: Probability of Rate Hike in 2026 Jumps Significantly

The Reserve Bank of Australia plans to announce its latest interest rate decision on December 9th. Although the central bank has already cut rates three times in 2025, considering inflation stickiness and economic growth stability, industry analysts expect the RBA to keep the benchmark rate steady at 3.6%.

What truly draws attention is the shift in market expectations regarding the RBA’s future policy path. Following the release of household spending data, traders’ bets on a rate hike in May 2026 surged from 18% on the previous trading day to 55%. This indicates that markets are beginning to price in the scenario of an “early rate hike.”

Abhijit Surya, an analyst at Capital Economics, pointed out that strong household spending rules out the possibility of further easing by the RBA and instead increases the risk of an earlier tightening cycle.

Exchange Rate Forecast: Multiple Institutions Favor Australian Dollar Appreciation

Based on a new understanding of the RBA’s policy trajectory, several international financial institutions have adjusted their views on the AUD’s outlook.

National Australia Bank (NAB) expects the AUD/USD to rise to 0.67 by December 2025 and further to 0.71 by the end of June 2026.

Westpac’s forecast is more optimistic, expecting the AUD/USD to reach 0.69 in March 2026, continue rising to 0.70 in September, and further increase to 0.71 before the end of the year.

ING’s outlook is relatively conservative, predicting the AUD/USD may reach 0.68 in Q2 2026 and rebound to 0.69 before the year’s end.

While there are differences in specific forecasts, the consensus is clear—the upward trend of the Australian dollar remains intact. As the global economic landscape shifts, the exchange rate relationships between the AUD and major currencies like the RMB are also evolving, which market participants involved in international trade and cross-border investment should monitor closely.

Future Outlook: Policy Shift Could Be a Key Factor

Whether the RBA will indeed start raising rates in the first half of 2026 will be a crucial variable in determining the AUD’s subsequent performance. If inflation remains high and the central bank is forced to tighten policy earlier, the AUD’s appreciation potential will be greater; conversely, if economic growth slows and suppresses inflation, delaying rate hikes, the AUD’s rally may be limited. From the perspective of exchange rate prospects, the market’s main expectation is for the AUD to appreciate within the 0.68-0.71 range.