AUD to USD continues to rise! The market is optimistic that the central bank will end the easing cycle, with interest rate hikes on the horizon.

The era of easing by the Reserve Bank of Australia may be coming to an end. As domestic demand remains strong and inflation stays high, market expectations for a policy shift by the RBA are heating up, with the probability of rate hikes significantly increased.

Strong Household Spending Drives Australian Dollar Appreciation

On December 4, the Australian Bureau of Statistics released the latest data, drawing market attention. October household expenditure rose by 1.3% month-on-month, far exceeding the market forecast of 0.6%; the annual growth rate reached 5.6%, also higher than the expected 4.6%. This data directly reflects the resilience of Australian consumer demand.

Stimulated by robust spending data, the AUD/USD exchange rate rose accordingly, reaching 0.6615 at the time of press, marking a more than one-month high. Meanwhile, the yield on the 3-year Australian government bonds broke through 4%, reaching a new high since January this year.

Inflation Unabated, Market Revisions Expectations

Previously, the Australian Bureau of Statistics announced that the October Consumer Price Index (CPI) increased by 3.8% year-on-year, exceeding market expectations, indicating that inflationary pressures have not shown the anticipated easing.

Based on these signals, Abhijit Surya, a macroeconomist at Keefe, Bruyette & Woods, stated: “The significant growth in Australian household spending confirms that there is limited room for the RBA to cut rates further. The risk lies in the possibility that policy may be forced to turn quickly to tightening.”

Central Bank Holds Steady, Rate Hike Expectations Rise

The RBA is scheduled to announce its latest interest rate decision on December 9. Although there have been three rate cuts this year, amid persistent inflationary pressures, the market expects the central bank to keep the benchmark rate steady at 3.6%.

More notably, expectations for rate hikes are changing. Before the release of household spending data, the market’s probability of a rate increase by May 2026 was only 18%; after the data was released, this probability jumped to 55%. This reflects a clear increase in investor confidence that the RBA will end its easing cycle and enter a rate-hiking trajectory.

Institutions Optimistic About AUD Outlook

Several financial institutions are optimistic about the future trend of the AUD/USD exchange rate. National Australia Bank (NAB) forecasts that the AUD/USD will reach 0.67 by December 2025 and further rise to 0.71 by June 2026. Westpac’s forecast is even more aggressive, expecting 0.69 in March 2026, rising to 0.70 in September, and reaching 0.71 by the end of the year. ING estimates that the AUD will hit 0.68 in Q2 2026 and reach 0.69 by year-end.

Currently, the market has fully priced in expectations of a policy shift by the RBA. In an environment of high inflation and resilient domestic demand, the likelihood of the RBA moving from a rate-cutting cycle to a rate-hiking cycle is increasing.