ING revises AUD/USD short-term forecast to 0.71, expects 25bp RBA rate hike next week

Australian front-end yields are most sensitive to the outcome next week; around 5 basis points of tightening remains to be priced in if the RBA acts. Holding rates steady would probably weigh on the Australian dollar, since much of its October rally relied on rate expectations. Oil prices matter: further increases would push up fuel-driven inflation and strengthen the case for tightening, while a prolonged decline could take pressure off the RBA. The Federal Reserve's position continues to be the key outside influence on the Australian dollar.

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Earlier related content:

• RBA expected to raise rates to 4.85% for fifth time in 2026, banks warn of possible further move in February

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ING is positive on the Australian dollar's yield and expects the RBA to increase it next week, but views the Fed as the barrier to AUD/USD reaching 0.72.

Key points:

• ING upgraded its near-term AUD/USD projection to 0.71, though it does not foresee a move back to 0.72 in the current quarter.
• The bank says the Australian dollar provides the highest short-term carry in the G10 when adjusted for volatility.
• ING forecasts a 25-basis-point RBA rate increase on 3 November, which would bring the cash rate to 4.85%, compared to the roughly 20 basis points currently priced in.
• Annual headline CPI reached 4.3% in September, with fuel-driven transport costs accounting for nearly all of the rise.
• Inflation for both goods and services exceeds 4%, and core inflation picked up pace.
• A Fed that remains hawkish is anticipated to continue backing the US dollar, capping gains for the Australian dollar.

The bank has revised its near-term AUD/USD forecast upward to 0.71, pointing to the currency's robust performance in October and its appealing yield edge. Yet ING does not anticipate the pair returning to 0.72 in the current quarter because the Fed's hawkish posture continues to prop up the U.S. dollar.

This revision is based on ING's expectation that the RBA will increase the cash rate by 25 basis points on 3 November, instead of delaying until December. Such a move would take the cash rate to 4.85%. The bank had earlier assumed a hike sometime in Q4, but now views the most recent inflation figures as sufficient to accelerate the decision. Traders are pricing about 20 basis points of tightening for the upcoming meeting, a bit less than the full 25.

ING noted that AUD/USD moves predominantly based on short-term interest rate gaps. The Australian dollar now provides the highest short-term carry in the G10 when adjusted for volatility, the bank added. Carry is the return investors get from owning a currency with a higher yield, and an additional RBA rate rise would increase that edge.

The inflation picture supports the case for a hike. Annual headline CPI was 4.3% in September, with inflation accelerating by about 90 basis points over the three months through September, according to the latest monthly data and the Q3 report. The near-totality of that rise stemmed from transport costs, primarily due to more expensive fuel. ING observed that both goods and services inflation are currently above 4%, indicating that energy costs are penetrating more into the economy. Core inflation also sped up on both an annual and a quarterly basis. The trimmed mean climbed to 3.7%, exceeding expectations and sitting well above the RBA's target range.

ING concluded that underlying inflation is not following a sustained downward trajectory, thereby weakening any rationale for a pause. At its previous gathering, the RBA hiked rates unanimously and indicated it would tolerate some labour market weakening to return inflation to its goal.

The main barrier to further Australian dollar appreciation resides outside the country. With the Fed also adopting a hawkish stance, ING anticipates that the U.S. dollar will stay backed, limiting AUD/USD upside in the near term even if the RBA acts next week.

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The RBA is expected to deliver a rate increase on Tuesday of next week.