The Australian dollar's rebound looks promising! Expectations of interest rate hikes are driving it up. How do banks view the future market?

The Reserve Bank of Australia’s policy outlook seems to be shifting. Data released by the Bureau of Statistics on December 4th sent a strong signal to the market—October household spending increased by 1.3% month-over-month, far exceeding the expected 0.6%, with annual growth reaching 5.6%, well above the 4.6% forecast. How strong is this data? It directly pushed the Australian 3-year government bond yield above 4%, hitting a new high for the year.

The AUD/USD has surged accordingly, trading at 0.6615 at the time of writing, hitting a recent high. Abhijit Surya, an economist at Capital Economics, openly stated, “Household spending data confirms that the RBA will not cut interest rates further; instead, it faces pressure to tighten policy ahead of schedule.”

Inflation is not over yet, the RBA may need to raise interest rates next

It appears that Australia’s inflation problem is more stubborn than expected. The previously announced October Consumer Price Index (CPI) increased by 3.8% year-over-year, exceeding expectations, indicating no signs of easing inflation. The RBA is scheduled to announce its latest interest rate decision on December 9th. Although it has cut rates three times this year, given the rising inflation pressures, it is expected to keep rates steady at 3.6%.

Here’s the real turning point—the market is starting to heavily bet on a rate hike in 2026. After the household spending data was released, the market’s probability of a rate increase in May 2026 jumped from 18% on Wednesday to 55%. This is not a minor adjustment but a clear shift in market sentiment.

Future AUD outlook, three major banks have different plans

Regarding the future trend of the AUD/USD, several major banks share a similar outlook but differ in the strength of their predictions.

National Australia Bank (NAB) is the most optimistic, forecasting the AUD to reach 0.67 by December 2025 and further rise to 0.71 by June 2026. Westpac’s forecast path is more detailed, expecting it to hit 0.69 by March 2026, rise to 0.70 by September, and reach 0.71 by the end of the year. ING’s forecast is relatively conservative, expecting the AUD to rise to 0.68 in the second quarter of 2026 and reach 0.69 by year-end.

Although the specific numbers differ, all three banks point in the same direction—the AUD will continue to rise. Behind this high consensus is a shared optimistic outlook on the RBA’s rate hike expectations.

Market sentiment shifts, the AUD still has room to rise

Domestic demand remains strong, inflation remains high, and the RBA is being pushed toward rate hikes. The unexpectedly robust household spending and the high CPI readings have thoroughly changed market expectations for Australian monetary policy. The rebound in the AUD’s performance is not a fleeting phenomenon but a true reflection of this shift. If expectations of a rate hike in 2026 continue to heat up, there is considerable upside potential for the AUD/USD.