RBA breaks two-year pause with hawkish rate hike, AUD/USD poised for further gains

• The RBA raised the official cash rate by 25 basis points, ending a two-year holding pattern.
• The move is likely the start of a new tightening cycle, with further hikes expected to combat inflation not returning to target until mid-2028.
• The hawkish decision caused the AUD/USD pair to surge by over 1%, reclaiming the psychologically significant 0.7000 level. Is the rally sustainable?

Most Read: Silver (XAG/USD) Outlook: Selloff takes a break, but it is over?

The Reserve Bank of Australia (RBA) broke a two-year holding pattern by raising the official cash rate by 25 basis points to 3.85%. This decision marked the first rate hike since November 2023, signaling a major shift in the RBA’s assessment of the Australian economy as inflation proved more "sticky" than previously anticipated.

Governor Michele Bullock cited a "material" pickup in inflation during the second half of 2025 as the primary driver for the move. The RBA outlined four specific reasons for the tightening:

1. Resilient Private Demand: Australians continued to spend and borrow more aggressively than the bank had forecasted. Private demand was described as growing "substantially more than expected."
2. Supply Constraints and Productivity: The economy is operating closer to its supply capacity than previously thought. Weak productivity growth has meant that even modest increases in demand are generating significant price pressures.
3. Easing Financial Conditions: Despite high rates, the RBA noted that financial conditions had actually eased over the summer. Rising home prices, increased lending, and easier access to credit suggested that previous policy settings were not restrictive enough.
4. Global Resilience: The global economy has remained surprisingly robust, which has fed back into domestic price pressures and kept the labor market "a little tight," with unemployment remaining lower than expected.

No surprise here really just looking at Australian inflation over the last 12 months which has risen dramatically. The concern for the RBA is that price pressures remain broad-based at this stage and show little sign of retreat.

The RBA’s updated forecasts suggest that this hike is likely the beginning of a new tightening cycle rather than an isolated adjustment.

Inflation Forecasts: The bank revised its trimmed mean inflation forecast upward to 3.7% for mid-2026 (up from 3.2%). Critically, the RBA does not expect inflation to return to the 2.5% target midpoint until mid-2028.

Further Hikes: Major financial institutions, including CommBank (CBA) and NAB, are already pricing in at least one more 25bp hike in May 2026, which would take the cash rate to 4.10%.

The latest rate probabilities from LSEG shows a 65% probability of a hike in May 2026.

However when looking at the implied rate through December 2026, LSEG data is showing 49 bps of rate hikes.

This leaves the door open for the RBA to potentially hike rates two more times this year, which bodes well for Australian Dollar bulls as the Aussie looks to build on its recent rally, especially against the US Dollar.

Implied Rates Through December 2026

Growth Trade-off: To combat the "sticky" inflation, the RBA has downgraded its GDP growth outlook to 1.6% starting mid-next year, acknowledging that higher rates will eventually weigh on the broader economy.

From a technical perspective, AUD/USD had breached the 0.7000 mark prior to the rate decision before a pullback left the pair trading at 0.6950 heading into the decision.

The pair has since reclaimed the 0.7000 handle but does face a challenge.

There is room for a deeper pullback before the rally to the upside continues and this may depend on the US Dollars performance in the days ahead.

A daily candle close above the 0.7000 mark may give bulls hope of further gains however failure to do so could open the door for a deeper pullback.

If a deeper pullback does materialize, the 0.6750 handle may be of particular interest as this is where the bullish rally really gained traction around January 21, 2026.

Over the longer-term though, the Aussie is poised for further gains. A divergence in monetray policy with the RBA hiking while other central banks look toward cuts is expected to provide continued support for the AUD.

Immediate upside resistance is provided by the January highs at 0.7094.

AUD/USD Daily Chart, February 3, 2026

Follow Zain on Twitter/X for Additional Market News and Insights @zvawda