Australia's rate hike expectations heat up! The Australian dollar against the US dollar hits a 14-month high, with institutions optimistic about continued gains in 2026

**Policy Divergence Drives Australian Dollar Strength**

At the start of 2025, the AUD/USD performed remarkably. It broke through 0.6727 on December 29, reaching a new high since October 2024, closing at 0.6706 on December 30. Since the beginning of the year, it has risen by 8.4%, showing a clear upward trend.

This rally is driven by divergence in policy directions between the Australian and US central banks. In Australia, rebounding inflation data triggered hawkish signals, and the December meeting minutes hinted at a rate hike bias. The market generally expects the Reserve Bank of Australia to initiate a rate hike cycle in 2026. In contrast, the Federal Reserve remains on a rate-cutting trajectory, with market forecasts predicting two more rate cuts in 2026. The widening interest rate differential directly benefits the Australian dollar.

**Commodity Bull Market Fuels the Rally**

In addition to policy factors, the strength of commodity markets has also contributed to the Australian dollar. Recently, gold, silver, and copper have all hit record highs. As a resource-exporting nation, Australia's rising commodity prices bring economic benefits and further boost the attractiveness of the AUD.

**Institutions Generally Bullish on 2026 Outlook**

Regarding the future, Wall Street and local analysts show a consensus bullish attitude. Deutsche Bank expects the AUD/USD interest rate differential advantage among G10 currencies to continue expanding, forecasting it will reach 0.69 in Q2 2026 and rise to 0.71 by year-end. The National Australia Bank is even more optimistic, predicting that with the Reserve Bank of Australia raising rates twice in 2026, the AUD/USD will surge to 0.71 in Q2 and further climb to 0.72 in Q3.

**Key Events to Watch**

However, the Australian dollar's subsequent performance remains uncertain. The release of Australia's Q4 CPI on January 28 and the RBA's interest rate decision on February 3 are two key data points that will be crucial for market judgment on the certainty of rate hikes. If CPI results exceed expectations, it will reinforce rate hike expectations. The central bank's decision will directly impact whether the AUD can maintain its strength. Investors should closely monitor these two events, as they will be the decisive tests for whether the AUD's rally in 2026 can continue.