RBA rate hike expectations drive AUD/USD higher, central bank policy divergence becomes prominent

The interest rate hike signals released by the Reserve Bank of Australia(RBA) are becoming the main support factor for the recent AUD/USD exchange rate. As market expectations of the RBA adopting a tightening policy in 2026 strengthen, the Australian dollar rose to 0.6690 during the Asian session on Friday, recovering from the previous trading day’s decline.

Economic Data Will Determine RBA’s Policy Direction

Australia will release the Q4 Consumer Price Index(CPI) data on January 28, which is crucial for the central bank’s decision-making. Market analysts generally believe that if core inflation data exceeds expectations, the RBA may initiate a rate hike at the policy meeting on February 3. RBA Governor Michelle Bullock previously stated that although the board has not directly discussed raising interest rates, they have assessed scenarios where rates may need to be increased in 2026. According to the December meeting minutes, policymakers are prepared to adopt a more tightening monetary policy stance if inflation fails to decline as expected.

Manufacturing Data Shows Growth Momentum Slowing

Australia’s Manufacturing Purchasing Managers’ Index(PMI) for December was reported at 51.6, slightly below the previous 52.2 and unchanged from November. Although the index remains at a three-month high, the growth rate of production and new orders has slowed, indicating that economic growth momentum is gradually weakening.

Federal Reserve Policy Divergence Supports AUD/USD

A weaker US dollar provides another layer of support for the Australian dollar. The Federal Reserve is expected to cut interest rates twice further in 2026, contrasting sharply with the potential rate hikes by the RBA, highlighting a clear divergence in policy trajectories between the two major central banks. Market expectations suggest that President Donald Trump will appoint a new Federal Reserve Chair after Jerome Powell’s term ends in May, which could lead to further easing of US monetary policy. The December meeting minutes of the(FOMC) show that most participants favored pausing further rate cuts as inflation gradually declines. However, some Fed officials believe that maintaining stable rates might be a more prudent choice after three rate cuts in 2025 supported a weak labor market.

Policy Divergence Expands AUD Outlook

The current trend of AUD/USD reflects a deeper phenomenon: two central banks are standing at a stark policy crossroads. The Reserve Bank of Australia faces inflation pressures that require tightening, while the Federal Reserve is preparing to further loosen policy amid a soft labor market. This divergence in policy expectations will continue to provide upward momentum for the Australian dollar against the US dollar.