AUD slips but early RBA rate hike hopes may limit losses

Daily Currency Update

The Australian dollar (AUD) slipped lower against the US dollar (USD) on Wednesday, marking its fifth straight day of losses. While the downward trend reflects ongoing strength in the greenback and cautious global sentiment, the Aussie’s decline may not be one-sided for long. Growing speculation around an earlier-than-expected interest rate hike by the Reserve Bank of Australia (RBA) could help limit further downside in the AUDUSD pair.

Recent shifts in expectations from major Australian banks have brought renewed attention to the RBA’s policy outlook. Both the Commonwealth Bank of Australia and National Australia Bank now believe the central bank may begin tightening monetary policy sooner than previously anticipated. Their revised forecasts come in response to persistent inflation pressures and signs that Australia’s economy is operating close to full capacity, making it harder for price growth to cool naturally.

These expectations were reinforced by the RBA’s decision to hold interest rates steady at its final policy meeting of 2025, while maintaining a notably hawkish tone. Although the central bank stopped short of signalling an immediate rate hike, policymakers emphasised that inflation risks remain elevated and that future decisions will depend heavily on incoming economic data. This cautious but firm stance has kept markets alert to the possibility of earlier action.

Interest rate markets reflect this growing uncertainty. Current swaps pricing suggests a roughly 28% probability of a rate hike as early as February, rising to nearly 41% by March. Looking further ahead, an increase by August is now almost fully priced in. These expectations highlight how quickly sentiment has shifted, particularly compared to earlier views that the RBA would remain on hold well into the year.

For the Australian dollar, this evolving rate outlook could provide a degree of support, even as external pressures weigh on the currency in the near term. Higher interest rates typically enhance a currency’s appeal by improving yield prospects, which can attract foreign investment. As a result, any confirmation of stronger inflation or tighter labour market conditions may bolster the case for an earlier move by the RBA and help stabilise the AUD.

In the days ahead, traders are likely to keep a close eye on economic releases and central bank commentary for clearer guidance. While the AUD faces short-term challenges, the possibility of tightening monetary policy may offer a counterbalance, keeping the currency in play as markets reassess Australia’s interest rate trajectory.