Australian Dollar Gains After CPI Jump Raises RBA Hike Risk

The Australian Dollar strengthened after inflation jumped further above target, lifting the AUD/USD exchange rate toward 0.70 as hotter-than-expected CPI increased the risk of a Reserve Bank of Australia rate hike as early as February.

Australian Inflation Climbs to 3.8% and Opens the Door to a Rate Hike

Australian inflation surprised to the upside in December, pushing the Australian Dollar higher and reviving expectations that the Reserve Bank of Australia could hike rates as early as February.

CPI is now well above the RBA’s 2–3% target band, and markets are increasingly pricing in the risk that Australia becomes the first major economy to reverse its cutting cycle.

AUD/USD showed some relative strength following the release, trading around the 0.70 level despite a volatile backdrop in global markets.

Markets have had a turbulent week, with a series of sharp moves keeping traders on edge. The first major catalyst came from Japan, where a hawkish Bank of Japan meeting last Friday and suspected currency intervention triggered a powerful rally in the yen. That was followed by extreme volatility in precious metals, with silver posting a rare 14% rally and an equally sharp 14% sell-off in the same session.

Attention then shifted to the US dollar, which slid through its 2025 lows on Tuesday. When asked whether the dollar had fallen too far, President Trump said it was “doing great”, reinforcing the view that the administration is comfortable with a weaker currency to boost competitiveness and asset prices.

Against this backdrop, Wednesday’s Australian CPI release stood out as a clear domestic driver, giving the Australian Dollar a lift and reopening the debate around an RBA rate hike next month.

Hot Inflation Boosts Odds of an RBA Hike

Australian inflation reaccelerated sharply in the final quarter of 2025. Headline CPI rose 3.8% year on year in December, up from 3.4% in November and well above the consensus forecast of 3.5%.

The data suggests the final stage of disinflation is proving difficult, with price pressures broadening rather than easing across the economy.

The Reserve Bank of Australia’s preferred measure of underlying inflation, the trimmed mean, also moved higher to 3.4% for the quarter. This sits comfortably above the RBA’s 2–3% target range and exceeded the central bank’s own projections.

Housing and services were the key drivers. Rents and dwelling prices rose 5.5% over the year, while electricity prices jumped 21.5% as government energy rebates expired. Costs linked to travel, insurance and other services also recorded double-digit increases, highlighting the persistence of services inflation.

Markets reacted by lifting the probability of a February rate hike. Westpac argued the inflation data could prove decisive:

“With the other data finely balanced, the quarterly inflation print gets the casting vote. Today’s data voted for a rate hike.

After preparing the ground in recent weeks for a rate hike, we believe the RBA Monetary Policy Board will follow through on these warnings with a 0.25ppt increase in the cash rate to 3.85%.”

While a hold remains possible, expectations have clearly shifted in a more hawkish direction. That shift has helped underpin the Australian Dollar, even as broader risk sentiment remains fragile.

Attention now turns to the Federal Reserve meeting later in the week. While it will attract significant headlines, a policy hold is widely expected and any market reaction is likely to hinge on the tone of the statement and voting patterns.

The US labour market appears to have stabilised, with unemployment back at 4.4% and jobless claims holding near 200,000. Combined with GDP growth of around 4.4%, there is little immediate case for further Fed easing.

Chair Powell, already under political pressure, is expected to strongly defend the Fed’s independence. A slightly hawkish tilt could lend the US dollar some temporary support, but with rate cuts already pushed out and leadership change looming later in the year, any dollar rebound may prove short-lived.