AUD/USD jumps as the RBA pivots to rate hikes

AUD/USD Analysis

The Reserve Bank of Australia raised interest rates by 25 basis points to 3.85% ^[1], marking the first hike in over two years and coming just a few months after its last cut. The pivot was driven by intensifying price pressures, improving economic conditions and a stronger labour market. Although the Board did not provide forward guidance, these forces and updated projections point to further tightening.

Policymakers noted that inflation "picked up materially" in the second half of 2025 as Q4 headline CPI accelerated to 3.6%, the highest level in more than a year. They judged it is "likely to remain above target for some time" and do not expect it to fall below this level this year ^[2]. At the same time, unemployment has been declining and officials lowered their jobless rate projections. Crucially, these forecasts are based on a higher implied rate path that points to "one cash rate rise in the coming months and a second increase by the end of this year".

AUD/USD jumped after the hawkish decision and prospects of additional tightening have created a favourable monetary policy differential. Markets are pricing in two Fed cuts in 2026 and the USDOLLAR faces structural headwinds from broader de-dollarisation and debasement trends. After defending the 38.2% Fibonacci retracement of this year's advance, the Aussie now has scope to push towards new multi-year highs. On the other hand, AUD/USD remains vulnerable to renewed pressure towards the EMA200, which would test the bullish bias.

Despite the improvement, the Australian economy continues to face headwinds and officials lowered their GDP projections for the end of the year while highlighting uncertainty around the outlook, which could challenge the case for further hikes. Meanwhile, the greenback has rebounded in recent days and could prove resilient. The nomination of Kevin Warsh to lead the Fed has eased independence concerns and could limit the scope for monetary easing.