Overview

The Australian dollar has opened 2026 as the strongest-performing G10 currency so far, holding firm even as the commodity backdrop has become less supportive. Iron ore started the year well but has since pulled back, gold momentum has cooled, and energy prices have seen a sharp decline. Despite that shift, AUD has remained well bid on a clear domestic driver: interest-rate expectations.

Markets continue to price a higher-for-longer stance from the Reserve Bank of Australia. OIS pricing implies roughly 40bp of tightening over the year, which is close to two 25bp moves in practice. This has supported Australian yields and improved the appeal of AUD carry strategies. RBC research has also highlighted that AUD now offers the highest carry in G10, recently surpassing GBP.

The data flow has reinforced the narrative. Inflation remains sticky above the RBA’s target, while household spending has surprised to the upside, rising 1.0% m/m in November after a 1.4% m/m gain in October. With demand holding up, policy makers have reason to remain cautious on inflation risks. Recent guidance has leaned in the same direction, with communication from Governor Bullock in December and Deputy Governor Hauser in January interpreted as suggesting the next move is more likely a hike than a cut.

GBP/AUD: AUD strength pressures the cross

Sterling has weakened against AUD in early January, with the cross drifting lower as relative rate support shifts toward Australia and carry demand remains a tailwind.

GBP/AUD has eased from the 2.02 area toward 2.00, briefly trading below 2.00 mid-month. The move reflects two main forces: a constructive AUD rates narrative versus a GBP profile that remains stable but lacks a fresh catalyst. Near term, the balance of risks stays mildly tilted to further GBP/AUD softness, assuming markets retain a tightening bias for the RBA and risk sentiment remains broadly steady.

EUR/AUD: euro drifts lower as carry stays in focus

EUR/AUD has also moved lower into mid-January, with the euro losing ground as investors continue to favour AUD exposure through the yield channel.

The cross has shifted from the mid 1.75 to 1.76 zone toward the 1.73 to 1.74 area. The decline has been driven less by a commodity surge and more by sustained demand for AUD carry. For now, EUR/AUD remains vulnerable to further downside if the RBA pricing story stays intact, although the pair remains sensitive to any abrupt deterioration in global risk sentiment.

USD/AUD: range trading, waiting for the next rates impulse

AUD has traded in a relatively contained range against the USD, balancing supportive local carry dynamics against periodic bouts of USD strength tied to the US rates complex.

AUD/USD has largely held in the high 0.66s, with limited follow-through in either direction. The near-term outlook remains dependent on the next leg in relative rates pricing. A cleaner AUD/USD breakout higher likely requires either a softer US yield impulse or a renewed upgrade in RBA hike expectations, while a stronger USD regime would continue to cap rallies.

Looking ahead

AUD’s Q1 direction should remain rate-led, with carry dynamics likely to keep AUD supported unless global risk appetite deteriorates materially.

Key catalysts

• RBA messaging and data dependence: inflation, labour market prints, and consumption indicators.

• OIS repricing risk: any shift away from the current tightening bias would be AUD-negative.

• Global rates and USD direction: US yields remain the swing factor for AUD/USD.

• Risk sentiment and China pulse: sharp risk-off episodes can still overwhelm carry support.

Base case

• AUD stays constructive in Q1 with a mild upward bias, provided domestic data remains firm and markets continue to price a credible risk of further RBA tightening.