Will the Australian dollar maintain its strength in 2026? Diverging central bank policies and geopolitical risks are key factors

The performance of the Australian dollar in 2025 has been remarkable. Driven by a weakening US dollar, resilient Australian economy, and adjustments in tariff expectations, the AUD/USD appreciated by approximately 7% over the year. This rally reflects the market’s re-pricing of the Australian currency’s outlook.

But entering 2026, whether the Australian dollar can continue to rise becomes less certain. Predictions vary among institutions, but they all point to a core question: who will lead the exchange rate trend— the hawkish stance of the Reserve Bank of Australia or changes in the Federal Reserve and global risk sentiment?

RBA shifts to hawish stance, but Fed pace remains a variable

As inflation pressures in Australia rise, the market has largely believed that the RBA’s rate cut cycle has ended. However, opinions differ on whether the RBA will raise rates in 2026.

Westpac leans towards a conservative outlook, expecting the RBA to hold steady in 2026. Conversely, the Commonwealth Bank of Australia, National Australia Bank, and Citibank are more hawkish— with the Commonwealth Bank expecting one rate hike, and NAB and Citi anticipating two hikes (each in February and May).

The Federal Reserve’s pace is equally critical. Currently, markets expect the Fed to cut rates twice in 2026, but JPMorgan offers a more cautious forecast— only one rate cut. Regardless of which scenario materializes, the Fed’s rate cuts are expected to be milder than the RBA’s rate hikes, and this divergence in monetary policy supports the upward movement of AUD/USD.

Economic resilience vs. China risk tug-of-war

In 2025, Australia’s economy performed steadily, with GDP growth exceeding expectations and unemployment remaining stable. The OECD forecasts that as household disposable incomes recover, Australia’s GDP growth will reach 2.3% in 2026, month-on-month. These solid economic fundamentals provide strong support for the Australian dollar.

However, there is an underlying risk. Australia’s economy is highly dependent on commodity exports, with China being its largest trading partner. If China’s economic growth slows more than expected, Australia’s export prospects and economic outlook could be overshadowed, putting downward pressure on the AUD. This could also indirectly impact the AUD/CNY exchange rate.

Risk currency attributes, black swans lurking

The Australian dollar is a typical “risk currency,” with global risk appetite serving as its barometer of volatility. When markets are optimistic, the AUD benefits; when risk aversion rises, the AUD becomes a preferred target for selling.

This is especially worth noting in 2026. If US President Trump reignites trade wars or if tensions in the Middle East escalate, market risk appetite could quickly collapse, directly depressing AUD/USD. From this perspective, the ceiling for AUD upside is already faintly visible.

Institutions generally optimistic, but disagreements remain

Looking ahead to 2026, most institutions are bullish on the Australian dollar. JPMorgan expects AUD/USD to reach 0.67 in Q1 and return to 0.68 by year-end. Deutsche Bank is even more optimistic, believing the interest rate differential among G10 currencies will continue to widen, forecasting 0.69 in Q2 and surging to 0.71 by year-end. NAB’s outlook is the most positive, expecting Q2 to reach 0.71 and possibly rising to 0.72 in Q3.

Overall, the probability of the AUD appreciating in 2026 is relatively high. However, this upward trend will not be smooth— the divergence in central bank policies, and whether they can offset pressures from Trump’s trade wars and geopolitical risks, remains the real suspense.