On December 29, the Australian dollar rallied, with the AUD/USD pair hitting a 14-month high of 0.6727. What causes the jump? Markets are now betting more than ever that the Reserve Bank of Australia will need to raise interest rates in early 2026. It’s just that Australia’s inflation isn’t coming down, and traders think its central bank will keep things tight for longer. The Aussie also found some buyers as the US Dollar weakened.
RBA Hints at More Tightening, Aussie Gets a Boost
The RBA’s December meeting minutes really got things moving. Policymakers don’t sound convinced that their current policy is doing enough to rein in inflation. They’re making it pretty clear: if inflation doesn’t drop like they want, they’re ready to tighten policy again. Now, everyone’s watching Australia’s Q4 CPI numbers, which come out January 28. If inflation comes in hot, a rate hike at the February 3 meeting looks likely.
Inflation in Australia remains high. In October, headline CPI hit 3.8%—well above the RBA’s 2–3% target. Expectations for future inflation jumped to 4.7% in December, adding fuel to the hawkish fire. Big banks like Commonwealth Bank and NAB expect rates to reach 3.85% at the RBA’s first meeting in 2026. Plus, there’s a wave of optimism thanks to China’s new investment plans, which benefit Australia given its close trade ties.
US Dollar Drops, Aussie Dollar Keeps Climbing
The US Dollar keeps losing ground as investors bet on more Fed rate cuts in 2026. After slashing rates by 75 basis points in 2025, the Fed looks set to cut twice more next year. That’s pushed the US Dollar Index down to around 97.90, and the Aussie Dollar just keeps moving higher.
Looking at the charts, AUD/USD is holding above key moving averages, and momentum stays strong. Some overbought signals are popping up now, so it wouldn’t shock anyone if they saw a pause or a bit of a pullback. Still, the big picture hasn’t really changed—the Aussie Dollar is riding an upward trend for now.
