Can the Australian dollar's rally continue? Inflation data reverses, and central bank policy divergence widens

The recent trend of the Australian dollar (AUD) has shown a clear turning point. On November 26, AUD/USD closed at 0.6505, up 0.6% from the previous day, marking four consecutive days of gains. This rebound was driven by an unexpected rise in Australian inflation data.

Inflation Data Reverses, Central Bank Rate Cut Expectations Change

In October, Australia’s CPI increased by 3.8% year-on-year, higher than the market expectation of 3.6%. This data sends a key signal: inflationary pressures are not easing as anticipated.

Analysis from Capital Economics indicates that the latest CPI data suggests little sign of easing inflationary pressures in Australia, directly undermining market bets on the Reserve Bank of Australia (RBA) continuing to cut rates. The firm further notes that if next week’s GDP data also shows rising capacity pressures, the entire easing cycle may be effectively over.

The immediate impact of this shift in expectations is a significant decline in market pricing for a rate cut by the RBA in December. Currently, the consensus is that the RBA will hold its policy rate at 3.60% at the December 9 meeting.

Rate Hike Expectations in 2026 Rise, AUD Support Strengthens

Regarding the monetary policy outlook for next year, financial institutions are divided. Some believe the RBA still has room to cut rates, but an increasing number now forecast a rate hike.

UBS analyst Stephen Wu stated that the current rising inflation trend is concerning, and the Consumer Price Index is likely to remain above the RBA’s target range over the next year. Therefore, he expects the RBA to initiate a rate hike cycle in Q4 2026.

Barrenjoey Chief Economist Jo Masters shares a similar view. Although the political and economic hurdles for raising rates are high, he believes the RBA is likely to act in 2026. He emphasizes that the final phase of inflation may require the central bank to adopt a more tightening monetary policy, stating, “From the current situation, there is no possibility of rate cuts in 2026.”

Exchange Rate Outlook: AUD Expected to Become a Strong Currency in G-10

These shifts in policy expectations are reshaping the valuation logic of the AUD. Francesco Pesole, an analyst at ING, said that the AUD is expected to become a standout among G-10 currencies by 2026. His reasoning is that the RBA’s policy will contrast sharply with the Federal Reserve—while the Fed is expected to continue cutting rates, the RBA may raise them.

Following this logic, by Q2 2026, the AUD could have the highest interest rate among G-10 currencies. Coupled with improving trade relations and relatively positive economic growth prospects in Australia, the AUD’s upward momentum is expected to continue into 2026.

The key variable now is next week’s GDP data. If capacity pressures are indeed rising, the market may need to further adjust expectations for the RBA’s policy.