Australian Dollar Strengthens Against US Currency Amid Rate Hike Expectations from RBA

The AUD/USD currency pair has posted notable gains, approaching the 0.6690 level during Asian trading hours on Friday, bouncing back from earlier weakness. The upward momentum reflects rising investor optimism regarding potential interest rate increases from the Reserve Bank of Australia.

The key catalyst for AUD strength lies in inflation data and monetary policy divergence. Markets are closely monitoring Australia’s Q4 CPI report scheduled for release on January 28. Should the core inflation figures exceed analyst expectations, this could support the case for a rate hike decision when the RBA convenes on February 3. RBA Governor Michele Bullock previously indicated that while rate increases were not formally proposed, the board discussed scenarios where policy tightening might become necessary during 2026.

Recent policy communications underscore the RBA’s readiness to act. The December meeting minutes revealed that policymakers are prepared to implement tightening measures if inflation does not moderate as anticipated. This hawkish stance stands in contrast to the shifting dynamics in the United States, where the Federal Reserve faces pressure toward loosening policy.

Manufacturing data provides additional context to the currency movements. Australia’s S&P Global Manufacturing PMI registered at 51.6 in December 2025, coming in slightly below the preliminary reading of 52.2 and matching the previous month’s level. Despite the marginal softness, the index maintained its three-month high, with production activity and incoming orders demonstrating continued expansion, though at a decelerating pace.

On the other side of the equation, the US Dollar faces headwinds as markets price in the possibility of two additional Federal Reserve rate cuts throughout 2026. This divergence in monetary policy trajectories between the Reserve Bank of Australia and the Federal Reserve provides a natural support mechanism for the AUD/USD pair. The potential shift in US leadership, with President Donald Trump preparing to nominate a successor to Fed Chair Jerome Powell when his tenure concludes in May, adds another layer of uncertainty regarding future American monetary policy direction.

The Federal Reserve’s December policy meeting minutes revealed that most policymakers believed it would be prudent to maintain the current pause in rate reductions if inflation continues to moderate organically. However, dissenting voices among Fed officials suggested maintaining rates at their current levels for an extended period might be optimal, given that three rate cuts were already implemented in 2025 amid labor market softening.

This constellation of factors—rising Australian inflation pressures, RBA policy readiness, and anticipated Fed restraint—continues to support AUD strength against the US Dollar.