AUD/USD begins 2026 positioned with a distinct macro advantage. Inflation risks have resurfaced in Australia, maintaining the RBA’s inclination towards restraint rather than easing. Meanwhile, the Federal Reserve is under increasing pressure to implement cuts as the US labor market shows signs of cooling and political dynamics become more intense ahead of the midterms. This policy divergence positions the risks unfavorably for the US dollar. From a technical standpoint, the US dollar index seems to have reached its peak, whereas AUD/USD is maintaining its long-term support around the 60c level. Seasonality indicates the need for patience at the beginning of the year; however, the improving conditions anticipated from Q2, along with a weaker USD environment, imply that rallies are more likely to continue rather than diminish. Unless there is a significant risk-off event, the conditions appear to support a stronger Australian dollar in 2026, with potential for AUD/USD to move back toward the low-0.70s throughout the year.
The perspective on the RBA has changed significantly in the last quarter. The initial consensus anticipated a solitary rate cut, potentially followed by another in 2026; however, this outlook has shifted towards a reevaluation of inflationary threats. Robust CPI and GDP results, combined with a resilient labor market, compelled the RBA to adopt a hawkish stance, leading markets to retract their easing expectations. The current pricing in money markets suggests that additional cuts are not anticipated, indicating that the easing cycle might have concluded after only three adjustments, with the cash rate remaining at 3.6%. As inflation re-emerges as a central concern, the spotlight is now on the potential for a policy shift towards higher rates — and whether the forthcoming quarterly CPI report will serve as a catalyst for such a decision.
Ultimately, a strong Q4 CPI report could set the stage for a potential rate hike as soon as February. With annualised trimmed mean inflation already positioned at the upper end of the RBA’s 2–3% target band, an upside surprise appears feasible and would reinforce expectations for a hawkish 25bp adjustment. The RBA faced significant scrutiny in the first half of 2025 for its persistent warnings regarding potential inflationary pressures — and for a considerable portion of the year, those apprehensions seemed unfounded. However, the Q4 CPI surpassing both market expectations and the RBA’s own forecasts has largely validated that position, with the likelihood of rate hikes now increasing. This situation necessitated a hawkish stance in December. Although a rate increase was not planned, the Board emphasized that inflation risks to the upside have resurfaced and specifically addressed the circumstances that might warrant a more restrictive policy. Decisions will be determined on a meeting-by-meeting basis, with the quarterly CPI release on 26 January now serving as a crucial inflection point. Nonetheless, the RBA is not expected to embark on a stringent tightening cycle. If unemployment maintains its steady increase — as observed over the last two years — the rationale for several rate hikes would diminish. In that scenario, a February adjustment could result in the cash rate reaching a peak of approximately 3.85%, followed by a policy shift towards an extended hold through the second half of 2026. Key Insight: Unemployment anticipated to rise gradually. The Consumer Price Index is expected to increase temporarily, leading to a 25 basis point hike in February or later in the first half of the year, before it cools in the second half, easing the pressure to raise rates beyond 3.85%.
The Federal Reserve executed a clearly anticipated 25bp reduction at its December meeting, signifying a third consecutive easing. Nonetheless, the divisions among voting members have cast uncertainty on the prospects for additional cuts, as indicated by the dot plot, which suggests only one 25bp cut in 2026. The labour market could be pivotal in determining the ease with which the Fed navigates 2026. The Federal Reserve’s task is significantly simplified if the labor market data in the United States continues to decline. Increasing unemployment tends to exert disinflationary pressures, providing policymakers with the opportunity to implement two to three reductions in interest rates. The result would also be consistent with President Trump’s ongoing advocacy for reduced interest rates. The 60c handle has consistently served as a resilient support level for AUD/USD since 2008. Bears seldom breach it — and when they do, the movement is fleeting and typically associated with a global disruption. The GFC was unable to maintain a breakout, whereas COVID and Trump’s tariff disputes resulted in merely transient declines. AUD/USD is once again showing a rebound from this significant psychological level. With the US dollar projected for a bearish year and the Chinese yuan strengthening, dips seem advantageous for AUD/USD bulls. Historically, January often experiences subdued performance, with subsequent fluctuations in returns throughout the rest of the first quarter. Typically, bullish momentum sees an improvement in April and June, with the pair often concluding the year on a strong note in Q4. The annual high-to-low range for AUD/USD has typically been about 13% in recent years, in contrast to a 10-year average of 17.7%. Assuming a 2026 low near 0.63, a 13% rally would indicate potential upside toward 0.712.