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Higher RBA interest rate expectations have prompted one of Australia's largest banks to lift its Australian dollar forecasts.
The Commonwealth Bank of Australia (CBA) has raised its Australian Dollar to US Dollar forecasts by two cents across the near-term horizon, citing a sharp rise in expectations for Reserve Bank of Australia (RBA) interest rates.
The upgrade trims the gains CBA expects for the pound against the Australian dollar, though its forecasts still sit above current levels.
"We have lifted our AUD/USD forecasts by 2 US cents though still predict it will fall to the mid-60s in early 2027. We are still among the more pessimistic forecasters of AUD/USD," says the October FX forecast update from Commonwealth Bank of Australia, the Australian lender.
CBA says AUD/USD has been modestly stronger than it expected, partly because markets have sharply raised their expectations for RBA interest rates.
The RBA raised the cash rate by 25 basis points to 4.60% on 29 September in a unanimous vote and kept its tightening bias.
Markets price around a 25% chance of another hike at the 3 November meeting.
CBA considers the Australian growth cycle and market pricing for further RBA hikes to have peaked, and it expects the economy to slow.
"We expect the Reserve Bank of Australia (RBA) to remain on hold in November before cutting interest rates twice in late 2027," says CBA.
Those cuts, alongside weaker commodity prices and a firmer US dollar, drive the dip CBA still forecasts for AUD/USD into early 2027.
CBA's new AUD/USD forecasts, with the previous forecasts in brackets:
• End-December 2026: 0.68 (0.66)
• End-March 2027: 0.66 (0.64)
• End-June 2027: 0.67 (0.65)
• End-September 2027: 0.69 (0.67)
• End-December 2027: 0.69 (0.68)
The bank's indicative trading range for AUD/USD at the end of December runs from 0.65 to 0.71. The Australian Dollar to US Dollar rate is currently at 0.6954, a short distance above the July low at 0.6923 and well below the year's high at 0.7277.
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Today, the Pound to Australian Dollar rate is at 1.8986. CBA's forecasts are lower out to mid-2027, but the year-end target still sits above spot:
• End-December 2026: 1.9412 (1.9545)
• End-March 2027: 1.9394 (1.9844)
• End-June 2027: 1.8507 (1.9231)
• End-September 2027: 1.8261 (1.8209)
The year-end forecast implies around 2.2% upside from current levels, down from roughly 2.9% under the previous forecast.
The end-March cut is larger. Upside to that point shrinks to around 2.1%, against 4.5% previously.
CBA then has GBP/AUD falling below spot by mid-2027, with the end-June forecast more than seven cents lower than before.
Further out, a bigger upgrade to GBP/USD lifts the pound's path: CBA now sees GBP/AUD at 1.8551 at the end of 2027, against 1.7647 previously, and at 1.8986 through 2028.
That reflects CBA raising its end-2027 GBP/USD forecast to 1.28 from 1.20, alongside a near-term upgrade to 1.32 from 1.29 for the end of December.
The Pound Side: Near-term GBP Tailwinds
CBA's forecasts for the pound rest on the Bank of England delivering fewer rate hikes than markets expect.
"We judge the market expects too many interest rate increases by the Bank of England (BoE). We expect only one interest rate increase from the BoE, compared to market pricing for four 25bp hikes. The BoE's bank rate is already in restrictive territory. And in our view the soft UK labour market will help to limit the pass-through of higher energy prices to underlying inflation," says CBA.
That view is behind the bank's forecast for GBP/USD to fall to 1.24 by mid-2027, a touch below its previous 1.25.
In the near term, CBA sees risks running in sterling's favour against the Aussie.
"Hawkish comments could increase market pricing for an interest rate hike by the Bank of England (BoE) in November and weigh modestly on AUD/GBP," says CBA's weekly FX strategy note.
A weaker AUD/GBP means a stronger GBP/AUD. CBA's current AUD/GBP reference of 0.5262 equates to 1.9005 in Pound to Australian Dollar terms.
The 28 October Budget is the main threat to the pound in CBA's view.
"As a result any loosening in the fiscal rules would weigh sharply on GBP/USD in our view," says CBA.
With CBA's AUD/USD forecasts unchanged, a GBP/USD move of that kind would erase the remaining upside in GBP/AUD.
Westpac and ANZ See a November Hike from the RBA
Turning to the Australian central bank, "the bar for a follow-up hike in November is low," says Luci Ellis, Chief Economist at Westpac. "Indeed, judging by the post-meeting rhetoric, a November hike is now the base case, absent a lasting resolution of the Middle East conflict beforehand, or some other event that significantly lowers the outlook for energy-related costs in Australia."
Westpac expects third-quarter trimmed mean inflation, the RBA's preferred measure of underlying price pressures, of around 0.9% q/q, which it says is too high for the RBA's comfort. Westpac is constructive on the Aussie. Its three-month forecasts of 0.72 for AUD/USD and 1.36 for GBP/USD imply a Pound to Australian Dollar rate near 1.8889, a little below spot.
ANZ also expects a November hike, taking the cash rate to 4.85%.
Elsewhere, Nomura is short GBP/AUD, a trade entered on 4 September with a target of 1.80 by the end of November.
Fading Household Resilience to Test Hawkish Resolve
Households are weakening fast enough to test the hawks, however.
The Westpac-Melbourne Institute Consumer Sentiment Index fell 4.7% to 80.4 in October. Respondents surveyed before the RBA decision scored 86.9, against 67.2 among those surveyed after it.
"The Westpac Consumer Sentiment Index dropped another 4.7% in October but it is the very low level, the steep drop-off following the RBA rate hike mid-week, and the extremely weak reads being seen across a range of sub-groups that are of more concern," says Westpac.
A sharper consumer slowdown would favour CBA's RBA 'hold' call and the modest GBP/AUD upside in its year-end forecast.
GBP/AUD sits just beneath 1.9000 and its 100-day moving average, the level that capped last week's rebound.
Our base case is for the 100-day to cap the pair, leaving GBP/AUD to drift back towards the 21-day average near 1.8874. A daily close above 1.9100 would open the way to 1.9362.
The next test of RBA expectations, and of CBA's upgrade, comes with the minutes of the September meeting, published next week.
"Looking ahead, the RBA September meeting minutes released next week may provide guidance on the RBA's tolerance for further tightening," says CBA.
Minutes that lean towards a November hike would expose GBP/AUD to the 21-day average at 1.8874. A softer read keeps CBA's year-end path towards 1.9412 in play.
