Australian dollar rallies as markets reprice RBA outlook

A powerful labour market surprise has pushed the Australian dollar to a 16-month high near US68.10c, forcing investors to rethink the path for interest rates.

Employment jumped by more than 65,000 in December while unemployment fell to 4.1 per cent, prompting bond markets to lift the implied probability of a February rate hike to about 60 per cent.

Barrenjoey strategist Andrew Lilley said conditions now resemble the early stages of a tightening cycle, pointing to strong housing activity and resilient consumer demand.

The data leaves the Reserve Bank in a more difficult position after it cut rates three times in early 2025 before pausing at 3.6 per cent.

Major banks including UBS and Bank of America now expect the cash rate to rise by 25 basis points to 3.85 per cent in coming months.

UBS chief economist George Tharenou warned that the labour market may need to soften further to ease inflation pressures.

Although headline inflation has slowed to 3.2 per cent, policymakers remain concerned that ongoing worker shortages could keep wage growth elevated.

Attention now turns to next week’s quarterly consumer price index release, which is likely to shape whether the RBA follows through with tighter policy.