Expectations of interest rate hikes in Australia are rising, and the Australian dollar exchange rate hits a 15-month high

As the Reserve Bank of Australia shifts its stance on interest rate hikes and the Federal Reserve continues its rate-cut cycle, the Australian dollar against the US dollar has gradually strengthened. According to TradingView data, on January 22, AUD/USD broke through the 0.68 level, rising 0.6%, and maintained an upward trend for four consecutive days, reaching its highest level since October 2024. The main driver behind this rally is the solid performance of Australia’s economic fundamentals.

Strong Employment Data Signals Possible Rate Hike in Australia

Australia’s December labor market data exceeded expectations, adding credibility to the case for a rate hike. Official statistics show that the month saw 65,000 new jobs created, well above the market forecast of 30,000; the unemployment rate unexpectedly fell to 4.1%, below the expected 4.4%. These impressive figures not only reflect the resilience of the Australian labor market but also provide fundamental support for the Reserve Bank of Australia to consider raising rates. Meanwhile, domestic inflation pressures remain, and several institutions believe this will force the central bank to adopt a more hawkish stance.

Rate Hike Expectations Rise, AUD/USD Could Break 0.70

Market expectations for an RBA rate hike have significantly increased. Peter Dragicevich, a currency strategist at Corpay, noted that with a strong economic environment and persistent inflation, the RBA has re-entered rate hike considerations. In contrast to the Fed’s rate-cut cycle, the divergence in monetary policies between the two countries is expected to widen the interest rate differential, providing medium-term support for the AUD. The firm forecasts that the AUD/USD could rise to 0.70 within the year.

Citigroup on Wall Street maintains its previous outlook, expecting the RBA to raise rates in February and May. Analysts at Commonwealth Bank of Australia and National Australia Bank also generally believe that the RBA will announce a 25 basis point hike at the February 3 meeting.

Diverging Market Views Leave Hike Timing Uncertain

Although institutional forecasts are relatively aligned, market pricing reflects a different attitude. According to interest rate futures data, traders currently assign only a 25% probability to a rate hike in February, while a 75% chance indicates rates will remain unchanged. This significant gap between market expectations and institutional views highlights cautiousness regarding the timing of rate hikes.

HSBC Chief Economist Paul Bloxham is even more conservative, suggesting that the Reserve Bank of Australia may pause rate hikes at the February meeting to better observe inflation trends. This outlook aligns with market pricing logic, implying that while the direction of rate hikes is clear, the exact timing remains uncertain pending further economic data.