Australian Dollar Falls Towards $0.70 as RBA Prepares Fifth Rate Hike Amid Persistent Inflation

The Australian dollar is weakening towards US$0.70 as investors prepare for a crucial Reserve Bank of Australia (RBA) monetary policy decision, with expectations building that the central bank will raise interest rates to their highest level in almost two decades.

The RBA is expected to increase its benchmark cash rate by 25 basis points to 4.85%, potentially marking its fifth rate increase of 2026. The anticipated move reflects policymakers’ determination to contain persistent inflation, which continues to exceed the central bank’s target range despite signs of softer labour-market conditions.

Australia’s headline inflation accelerated to 3.9% year-on-year in the third quarter, while underlying inflation remained elevated at 3.7%. Both measures are above the RBA’s 2–3% target range, reinforcing concerns that inflationary pressures remain embedded in the domestic economy.

Meanwhile, the Melbourne Institute Monthly Inflation Gauge increased by 0.5% in October, following a 0.3% rise in September, marking its fourth consecutive monthly increase and adding to expectations that monetary policy may need to remain restrictive.

Market Snapshot

Current Price Action

The Australian dollar is trading around US$0.70, extending its recent modest losses as currency markets assess the implications of another expected increase in Australian interest rates.

Despite expectations of tighter monetary policy, the currency has struggled to establish upward momentum. Investors appear to be weighing the potential support from higher domestic interest rates against concerns that persistent inflation and elevated borrowing costs could weaken economic activity.

The anticipated RBA decision is therefore becoming an important test of market sentiment.

A 25-basis-point increase is already widely expected, meaning the Australian dollar’s immediate response may depend more heavily on the central bank’s accompanying statement and forward guidance than on the rate decision itself.

Reserve Bank of Australia Policy Outlook

The Reserve Bank of Australia is expected to raise its cash rate by 25 basis points to 4.85%, potentially bringing borrowing costs to their highest level in almost two decades.

Such a move would represent the fifth interest rate increase of 2026, highlighting the central bank’s determination to bring inflation back within its target range.

The policy challenge remains significant. Inflation is proving persistent, while the labour market continues to show signs of underlying tightness despite a higher unemployment rate.

Markets will be watching closely for indications of whether policymakers believe further tightening may be necessary or whether the anticipated increase could be followed by a period of stable interest rates.

Any suggestion that additional increases remain possible could provide support for the Australian dollar. Conversely, a more cautious policy outlook could limit the currency’s recovery.

Australian Inflation Remains Above Target

Australia’s latest inflation figures reinforce the RBA’s concerns about persistent price pressures.

Headline consumer price inflation increased to 3.9% year-on-year in the third quarter, remaining significantly above the central bank’s 2–3% target range.

Underlying inflation, which provides a clearer indication of persistent domestic price pressures, remained elevated at 3.7%.

These figures suggest that inflation is not yet returning to target at a pace that would allow policymakers to ease their restrictive stance.

The persistence of underlying inflation is particularly important because it indicates that price pressures extend beyond short-term movements in volatile components.

For currency markets, the inflation outlook is central to expectations about the future path of Australian interest rates.

Melbourne Institute Inflation Gauge Signals Continued Pressure

The Melbourne Institute Monthly Inflation Gauge rose by 0.5% month-on-month in October 2026, accelerating from September’s 0.3% increase.

The latest reading marks the fourth consecutive monthly increase, reinforcing concerns that domestic inflationary pressures remain persistent.

Although the monthly gauge is not a direct substitute for official quarterly consumer price data, it provides an additional indication of emerging price trends.

The acceleration could strengthen the RBA’s determination to maintain a restrictive monetary-policy stance, particularly if official inflation measures continue to exceed target.

Further evidence of persistent price growth may increase expectations that interest rates will remain elevated for longer than previously anticipated.

Australian Labour Market and Employment Conditions

The Australian labour market presents a more complicated picture for policymakers.

The unemployment rate remained at 4.7% in September, representing a five-year high. However, RBA Governor Michele Bullock has described labour-market conditions as “a little tighter” than the central bank had anticipated.

This suggests that policymakers remain concerned about underlying employment conditions and their potential contribution to wage growth and inflation.

A labour market that remains relatively tight despite a higher unemployment rate could make it more difficult for inflation to return sustainably to target.

However, continued deterioration in employment conditions would increase concerns about the impact of elevated borrowing costs on households and businesses.

The RBA must therefore balance inflation control against the risk of placing excessive pressure on economic activity.

Interest Rate Differentials and the US Dollar

The Australian dollar’s direction will also depend on developments in US monetary policy and the broader performance of the US dollar.

Higher Australian interest rates can support the currency by increasing the relative attractiveness of Australian-dollar-denominated assets.

However, this support may be limited if investors simultaneously expect the Federal Reserve to maintain or increase US interest rates.

Changes in the interest-rate differential between Australia and the United States will therefore remain an important influence on AUD/USD.

A more hawkish RBA relative to the Federal Reserve could provide support for the Australian dollar, while stronger US economic data and higher US interest-rate expectations may create additional downward pressure.

Bullish Sentiment — Factors Supporting the Australian Dollar

1. Expected RBA rate increase: A 25-basis-point increase to 4.85% could support the Australian dollar by improving the relative attractiveness of domestic interest-bearing assets.
2. Persistent headline inflation: Inflation at 3.9% reinforces expectations that monetary policy will remain restrictive.
3. Elevated underlying inflation: The 3.7% underlying inflation reading suggests that domestic price pressures remain persistent.
4. Stronger monthly inflation gauge: October’s 0.5% increase adds to expectations that further policy restraint may be required.
5. Relatively tight labour-market conditions: Governor Michele Bullock’s assessment could strengthen expectations that the RBA will maintain a firm policy stance.
6. Potentially hawkish forward guidance: Any indication that further rate increases remain possible could encourage renewed demand for the Australian dollar.

Bearish Sentiment — Factors Weighing on the Australian Dollar

1. Weakening currency momentum: AUD/USD remains under pressure around 0.7000 despite expectations of higher interest rates.
2. Higher unemployment: The unemployment rate of 4.7% raises concerns about the strength of domestic economic activity.
3. Economic impact of restrictive policy: Further increases in borrowing costs could weaken household spending, business investment and overall economic growth.
4. Rate increase already anticipated: A widely expected 25-basis-point increase may provide limited additional support unless accompanied by hawkish guidance.
5. US dollar strength: Higher US interest-rate expectations could offset some of the support from Australian monetary tightening.
6. Potentially cautious RBA communication: Any indication that policymakers are approaching the end of the tightening cycle could encourage further selling.

AUD/USD Price Forecast — What Traders Are Watching

The Australian dollar is trading around the psychologically important 0.7000 level, with the RBA decision likely to determine the next significant directional move.

A 25-basis-point increase to 4.85% is widely anticipated. The more important question is whether policymakers indicate that further tightening may be required to contain inflation.

A hawkish policy statement could support AUD/USD and encourage a recovery above 0.7000, particularly if investors begin pricing in additional rate increases.

However, a more cautious assessment of economic conditions could limit the currency’s recovery, even if the RBA delivers the expected increase.

A sustained move below 0.7000 would indicate continued selling pressure, although confirmation would depend on subsequent price action and broader US dollar movements.

Traders should monitor:

• The RBA’s monetary policy decision.
• Governor Michele Bullock’s accompanying commentary.
• Expectations for additional interest rate increases.
• Australia’s headline and underlying inflation trends.
• Labour-market conditions and unemployment data.
• US dollar movements and Federal Reserve policy expectations.
• AUD/USD price action around 0.7000.

Supply Outlook

The supply of Australian dollars in international currency markets is influenced by monetary policy, capital flows, trade activity and investor positioning.

Higher domestic interest rates can encourage demand for Australian-dollar assets, potentially supporting the currency through international investment flows.

However, the impact depends on relative interest rates, economic growth expectations and broader global financial conditions.

If investors become concerned that additional monetary tightening could significantly weaken Australia’s economy, demand for Australian assets may become more cautious.

The supply outlook therefore remains closely connected to expectations for the RBA’s future policy decisions.

Demand Outlook

Demand for the Australian dollar may receive support from the anticipated increase in interest rates and continued expectations of restrictive monetary policy.

Persistent inflation provides a strong argument for maintaining elevated borrowing costs, which could improve the relative attractiveness of Australian-dollar-denominated investments.

However, currency demand will also depend on the performance of the US dollar and the strength of Australia’s domestic economy.

If the RBA delivers a hawkish policy message, demand could strengthen. Conversely, a more cautious outlook or evidence of economic deterioration could limit buying interest.

Market Outlook for the Coming Sessions

The Australian dollar remains under pressure around US$0.70 as markets prepare for a potentially significant Reserve Bank of Australia policy decision.

The expected increase in the cash rate to 4.85% reflects the persistence of inflationary pressures, with headline inflation at 3.9% and underlying inflation at 3.7%.

The latest Melbourne Institute Inflation Gauge also suggests that price pressures remain elevated, reinforcing expectations that policymakers will maintain a restrictive stance.

However, the unemployment rate of 4.7% highlights the challenge facing the RBA as it attempts to contain inflation without causing excessive economic weakness.

The Australian dollar’s immediate direction will depend heavily on the central bank’s forward guidance. A more hawkish outlook could support a recovery, while cautious communication may leave AUD/USD vulnerable to further weakness.

Today Markets Analysis

The Australian dollar is approaching an important monetary-policy event, with markets expecting the Reserve Bank of Australia to raise interest rates to 4.85%. Persistent inflation continues to justify a restrictive policy stance, but weaker employment conditions and concerns about economic growth are complicating the outlook.

The key issue for currency markets is whether the anticipated increase represents another step in an extended tightening cycle or whether the RBA is approaching a period of policy stability.

Currency Hedger View

For businesses trading between Australia and international markets, movements in AUD/USD can have a significant impact on import costs, export receipts and future cash flows.

Australian importers purchasing goods or services in US dollars may face higher costs if the Australian dollar weakens further. Exporters receiving US dollars, meanwhile, may benefit from a weaker domestic currency, although exchange-rate volatility can make future revenue more difficult to forecast.

Currency Hedger’s view is that businesses with upcoming Australian dollar exposures should assess the potential impact of the RBA decision and consider whether forward contracts, partial hedging or layered currency strategies could help manage exchange-rate uncertainty.

A structured approach to foreign exchange risk management can provide greater visibility over future transaction costs and help businesses protect commercial margins during periods of monetary-policy uncertainty.

Currency Hedger provides foreign exchange risk management solutions designed to help businesses assess currency exposure and explore strategies for managing exchange-rate uncertainty.

Open a Currency Hedger account or visit currencyhedger.com.

Disclaimer: This article is for general market information and educational purposes only. It does not constitute investment advice, a personal recommendation or an offer to buy or sell any financial instrument. Currency markets are volatile, and forecasts are subject to uncertainty. Businesses should assess their individual circumstances and seek appropriate professional advice before entering into any hedging transaction.

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