Australian Dollar Extends Gains, Equities Reach 5-Week Highs on Monetary Policy Expectations

The Australian dollar maintained its upward momentum during Tuesday trading, climbing to around 0.666 US dollars. This rise was bolstered by signals from the Reserve Bank of Australia (RBA) about the possibility of tightening monetary policy in the upcoming period, amid renewed inflationary pressures. Minutes from the central bank's December meeting indicated that policymakers discussed scenarios that could necessitate an interest rate hike in 2026, stressing the importance of monitoring sustained price pressures. Australia's annual inflation rate stood at 3.8% in October 2025, up from 3.6% in September, and remained above the RBA's target range of 2% to 3%.

Against this backdrop, markets began pricing in the likelihood of an interest rate hike as early as February, with major financial institutions, including Commonwealth Bank of Australia and National Australia Bank, expecting the rate to reach 3.85% at the RBA's first meeting of the new year.

These developments had a positive impact on the Australian stock market, with the S&P/ASX 200 index climbing to 8,738 points - its highest close since November 2025 - supported by improved sentiment and a relative decline in bond yields. The index gained approximately 2.5% over the past four weeks and 6.25% on an annual basis.

The Australian dollar also received additional support from a weaker US dollar, as expectations grew that the US Federal Reserve might implement two interest rate cuts in the coming year, enhancing the appeal of growth-linked and higher-yielding currencies.