The Australian dollar remains the strongest G10 currency in 2026, supported by expectations of further rate hikes from the Reserve Bank of Australia (RBA) and a firm labour market. Rabobank expects AUD/USD to climb toward the 0.72 area by year-end, assuming monetary policy stays restrictive.
Policy path and market pricing
After the RBA’s February rate increase, markets initially looked for a pause. That view has shifted as inflation risks linked to the conflict in the Middle East have raised the prospect of ongoing policy vigilance to keep price growth in check.
At the March meeting, the RBA lifted the cash rate target by 25 basis points to 4.10%, with a narrow five-to-four majority on the board. Governor Michele Bullock reiterated that demand is running stronger than the bank would like, underscoring a hawkish stance.
Market pricing now reflects expectations for another 25 basis-point increase within the next three months. Traders see the official cash rate ending 2026 above 4.00%, tilting interest rate differentials versus the United States in favour of the local currency.
Labour market supports hawkish stance
March labour force data showed total employment rising by 17,900, slightly below forecasts. However, the quality of jobs improved, with full-time employment up by 52,500 and part-time roles declining.
The unemployment rate held steady at 4.3%, according to the Australian Bureau of Statistics, highlighting ongoing tightness in the labour market. This underlying strength points to persistent wage and inflation pressures, helping justify the RBA’s restrictive policy bias.
The April consumer inflation expectations survey showed a rise to 5.9% from 5.2%, reinforcing the view that price pressures are not easing quickly and that the central bank is likely to stay on its current path.
Currency implications: aud strength, eur/aud downside
The combination of firm employment data, relatively clear policy guidance, and favourable rate differentials has provided broad support for the Australian dollar, particularly against the euro.
Rabobank sees downside potential for EUR/AUD, with the pair possibly revisiting the March low near 1.6130. Some projections suggest the cross could trade in a range of 1.6329 to 1.6995 by the end of December 2026, reflecting policy divergence between the RBA and the more cautious central bank in the Eurozone.
For those focused on European markets, this divergence is a key theme, as the Eurozone is not expected to match the pace of tightening seen in Australia.
Us dollar volatility amid geopolitical risk
The US dollar remains especially sensitive to developments in the Middle East, leaving it prone to bouts of volatility as global risk sentiment shifts. The conflict complicates the global inflation outlook and adds uncertainty to the trajectory of American policy settings.
This contrast enhances the appeal of the Australian dollar for traders seeking relative stability against currencies more directly exposed to geopolitical crosswinds.
Market backdrop and portfolio implications
With the Australian policy outlook comparatively well-defined, the local currency offers a clearer framework for those managing exposure to major currencies. In contrast, assets tied to the US dollar are likely to experience sharper swings, requiring a more flexible approach from those managing digital or multi-currency portfolios.
Overall, a tight domestic labour market, entrenched inflation expectations, and a hawkish RBA keep the Australian dollar on a firm footing, while policy and geopolitical uncertainty elsewhere continue to shape cross-currency dynamics into the end of 2026.
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