AUD 2026 May Reach a Turning Point: Central Bank's Hawkish Stance and Australian Election Double Drivers

In 2025, the AUD/USD( rose against the trend driven by multiple factors, with an annual increase of 7%. As we enter 2026, can this trajectory continue? Most market institutions lean towards optimism, but there are also many uncertainties.

Divergence in Central Bank Policies — Potential Drivers for the Australian Dollar

Australia’s inflationary pressures persist, and the market expects the Reserve Bank of Australia (RBA) to have closed its rate cut window. Regarding whether the RBA will raise interest rates in 2026, opinions among institutions vary: Westpac Bank believes the RBA will remain on hold; the Commonwealth Bank of Australia forecasts one rate hike; and National Australia Bank and Citibank are optimistic about two rate hikes (in February and May, respectively).

On the Federal Reserve side, the market generally expects two more rate cuts in 2026, although JPMorgan is more conservative, predicting only one cut. This “misalignment” in policy expectations provides support for the AUD — when the Fed continues easing while the RBA maintains or tightens, the relative attractiveness of the AUD naturally increases.

Domestic Economic Resilience vs. External Pressures

Australia’s economy in 2025 performed well, with GDP growth exceeding expectations and unemployment remaining stable. The Organisation for Economic Co-operation and Development (OECD) forecasts that as household disposable income recovers, Australia’s GDP growth in 2026 will reach 2.3%, further improving upon 2025.

However, risks include Australia’s high dependence on commodity exports, with China as its primary trading partner playing a crucial role. If China’s economic growth slows more than expected, Australia’s growth outlook will be under pressure, and the AUD exchange rate will likely decline. This is also why the outcome of the Australian federal election is closely watched — the new government’s economic policies will directly impact domestic growth prospects and, consequently, the AUD’s direction.

Shifts in Risk Sentiment — Hidden Variables

The AUD, as a typical risk asset, is highly sensitive to global sentiment. When risk appetite increases, the AUD benefits; when risk aversion rises, it is sold off. In 2026, if U.S. President Trump continues to escalate trade conflicts or if tensions in the Middle East worsen, risk appetite will decline, putting pressure on the AUD/USD. Such “black swan” events are hard to predict but can significantly alter the year’s tone.

What Do Institutions Say About the AUD Outlook for 2026?

Most institutions hold a constructive view of the AUD. JPMorgan believes that strong Australian economic growth and stable RBA interest rates will support the currency, expecting the AUD/USD to reach 0.67 in Q1 and close the year at 0.68.

Deutsche Bank is more optimistic, noting that the AUD’s interest rate advantage among G10 currencies will further increase, forecasting the AUD/USD to reach 0.69 in Q2 and 0.71 by year-end.

National Australia Bank’s outlook is the most bullish, expecting the AUD/USD to rise to 0.71 in Q2 and possibly surge to 0.72 in Q3.

Overall, the trajectory of the AUD in 2026 will depend on central bank policies, economic fundamentals, policy directions after the Australian election, and the evolution of global risk appetite. While the general outlook is positive, caution is advised regarding potential geopolitical shocks.