Is the Australian dollar's outlook positive before 2026? High inflation triggers divergence in central bank policies

The AUD/USD has recently rebounded strongly, and the underlying logic behind this movement is worth a deep dive. As Australia’s inflation data exceeded expectations, market expectations for the Reserve Bank of Australia’s (RBA) rate cut cycle have completely changed, opening up new possibilities for the Australian dollar’s outlook.

Inflation Data Breaks Expectations, RBA Rate Cut Cycle May Have Ended

On November 26, the AUD/USD rose to 0.6505, up 0.6%, marking four consecutive days of strength. Behind this rally was a significant blow from Australia’s October CPI data—year-over-year growth reached 3.8%, significantly higher than the market forecast of 3.6%.

This set of data sends a clear signal: inflationary pressures are not easing as quickly as expected. CICC Macro analysis pointed out that if next week’s GDP data also shows rising capacity pressures, the easing cycle of the RBA is likely already over. This means the era of consecutive rate cuts is a thing of the past.

Meanwhile, positive US economic data supports the Fed’s rate cut expectations, further weakening the US dollar’s strength and inversely boosting the Australian dollar’s relative value. The combination of these forces solidifies the AUD’s appreciation trend.

RBA Policy Path Changes, Rate Cut Dreams in 2026 Shattered?

On December 9, the RBA will announce its latest interest rate decision. The market consensus is to keep the policy rate steady at 3.60%. However, the real divergence lies in the outlook for future policy.

Traditional views hold that the RBA still has room to cut rates, but authoritative institutions like UBS have given a completely opposite judgment—they predict the RBA will turn to rate hikes in 2026. UBS analyst Stephen Wu explicitly stated that the current rising inflation trend is concerning, and the Consumer Price Index is likely to remain above the official target range over the next year. He expects the RBA to start raising rates in the last three months of 2026.

Barrenjoey Chief Economist Jo Masters is even more hawkish. He pointed out that although the threshold for rate hikes is very high, the possibility of the RBA taking action to raise rates in 2026 cannot be ignored. He emphasized that the final phase of inflation may require tighter monetary policy tools, and the rate cut path in 2026 is no longer visible.

AUD Outlook: From Rate Cut Beneficiary to Rate Hike Beneficiary

All of this indicates that the logic behind the Australian dollar’s appreciation is quietly shifting. The previous market bet on fewer rate cuts by the RBA and more by the Fed, creating an arbitrage mechanism, is giving way to a new pattern where the RBA may hike rates while the Fed continues to cut.

Analyst Francesco Pesole of ING Group is optimistic about the AUD outlook, believing that the Australian dollar is poised to outperform among G-10 currencies next year. His core view is that by Q2 2026, the AUD will have the highest interest rate among the G-10 currency basket, as the institution expects the RBA to only make one more rate cut before stopping.

This judgment is supported by two key factors: first, the policy shift driven by persistent inflation; second, improved trade relations in Australia leading to economic growth expectations. Under the influence of these two factors, the AUD’s upward momentum is expected to continue into 2026.

For investors, the key to the AUD outlook lies in policy divergence—the RBA shifting from rate cuts to maintaining or hiking rates, while the Fed remains in easing mode. This widening interest rate differential will continue to support the strength of the Australian dollar.