The Australian dollar's rate hike expectations support the exchange rate. Can the rally continue after reaching a 14-month high in 2025?

The Australian dollar performed well at the start of 2025. As of December 30, AUD/USD was quoted at 0.6706, up 8.4% from the beginning of the year, and on December 29, it touched 0.6727, hitting a new high since October 2024. Behind this rally are both the monetary policy divergence between the central banks and support from the commodity markets.

**AUD Interest Rate Policy as a Key Driving Force**

The core logic behind the AUD's rise lies in the policy divergence between the Reserve Bank of Australia (RBA) and the Federal Reserve. Recent signs of inflation rebound in Australia, along with the latest meeting minutes from the RBA signaling a hawkish stance, have led the market to broadly expect the RBA to start a rate hike cycle in 2026. Meanwhile, the Fed's rate cuts are ongoing, with the market anticipating two more cuts in 2026. The interest rate advantage of the AUD over the federal funds rate continues to widen, attracting capital inflows and becoming a significant support for the AUD's appreciation.

**Commodity Bull Market Fuels the Rally**

In addition to the policy spread, the strength of the commodity markets is also boosting the AUD. Recently, gold, silver, and copper prices have hit record highs, which is positive news for resource-exporting Australia. The rising commodity prices directly benefit the Australian economy and further solidify the AUD's upward momentum.

**Institutions Forecast Continued Rise in 2026**

Several institutions are optimistic about the AUD's outlook. Deutsche Bank expects the interest rate differential of AUD/USD among G10 currencies to further improve, forecasting a rate of 0.69 in Q2 2026 and 0.71 by the end of the year. The National Australia Bank (NAB) believes that with the RBA expected to raise rates twice, AUD/USD will rise to 0.71 in Q2 2026 and further climb to 0.72 in Q3.

**Upcoming Key Events Will Determine if the Rally Can Continue**

The future performance of the AUD still depends on key economic data. On January 28, Australia will release Q4 CPI data, and on February 3, the RBA will announce its latest interest rate decision. These two major events will directly influence market expectations of the AUD's rate hike path and determine whether the AUD can maintain its strength into 2026. Investors need to closely monitor these data points to assess whether the interest rate advantage is sufficient to support continued exchange rate gains.