Has the Reserve Bank of Australia’s interest rate cut cycle come to an end? Inflation data boosts the Australian dollar appreciation expectations

Australian Dollar Continues to Rebound Against the US Dollar, Rate Hike Expectations Rewrite Exchange Rate Dynamics

The market consensus has shifted towards a monetary policy turn for the Reserve Bank of Australia in 2026. On November 26, the AUD/USD quote was 0.6505, rising for four consecutive trading days, with a daily increase of 0.6%. Behind this rally is the market’s reassessment of Australia’s inflation trajectory and central bank policy outlook.

Inflation Surpasses Expectations, Reversing Market Rate Cut Bets

Australia’s October Consumer Price Index (CPI) increased by 3.8% year-on-year, noticeably higher than the expected 3.6%. Capital Economics pointed out that the latest CPI data indicates inflationary pressures have not effectively eased, and the probability of the central bank cutting rates in the short term is very low. If next week’s GDP data also shows rising capacity pressures, the easing cycle will essentially be over.

Meanwhile, US economic data support the Federal Reserve’s rate cut expectations in December, further weakening the US dollar against other currencies and making the Australian dollar’s relative strength more apparent.

2026 Rate Hike Becomes New Consensus, Breaking Traditional Expectations

The Reserve Bank of Australia is scheduled to announce its latest interest rate decision on December 9, with markets expecting the benchmark rate to remain at 3.60%. However, the real turning point is the policy direction in 2026.

UBS analyst Stephen Wu stated that the current inflation upward trend is concerning, and the Consumer Price Index is likely to remain above the Reserve Bank of Australia’s target range over the next 12 months. UBS therefore predicts that the RBA will initiate a rate hike in the fourth quarter of 2026.

Barrenjoey Chief Economist Jo Masters also agrees with the possibility of a rate hike. Although the trigger threshold for raising rates is very high, facing the final stages of inflation may require more tightening monetary policy, and the RBA’s actions in 2026 will leave no room for rate cuts.

Australian Dollar’s Rate Hike Potential Attracts Foreign Investment, Bright Outlook Against HKD

ING analyst Francesco Pesole is optimistic about the Australian dollar’s performance in 2026, expecting it to be the biggest gainer among G-10 currencies. His team believes that by the second quarter of 2026, the RBA may only implement one rate cut, which would give the AUD the highest interest rate level among G-10 currencies.

Considering the improvement in Australia’s trade relations and positive signals for economic growth, the appreciation potential of the AUD against the Hong Kong dollar and other emerging market currencies is also expanding. The rate hike cycle generally benefits the Australian dollar, and investors’ expectations for the AUD’s appreciation in 2026 are strengthening.