AUD Faces Mounting Pressure as Rate Hike Bets Clash with Technical Weakness

The Australian Dollar continues its slide against the US Dollar, extending losses to a sixth consecutive day despite growing market expectations of an RBA rate hike as soon as February. This paradoxical movement underscores the complex interplay between domestic inflation pressures and broader global monetary policy shifts.

Rising Inflation Expectations Fail to Support AUD Recovery

Australia’s Consumer Inflation Expectations climbed to 4.7% in December, recovering from November’s three-month low of 4.5%. This uptick has intensified speculation that the Reserve Bank of Australia may abandon its easing cycle earlier than initially projected. Major financial institutions, including Commonwealth Bank of Australia and National Australia Bank, have shifted their forecasts to anticipate tightening measures commencing in February—a significant revision from previous guidance.

The derivatives market reflects this hawkish repricing, with rate swaps indicating a 28% probability of a February rate increase, escalating to 41% for March, while August is nearly fully priced for a hike. The RBA’s resolute stance at its December meeting—maintaining rates despite inflation persistence—has further supported this narrative. Yet paradoxically, these supportive domestic fundamentals have failed to arrest the Australian Dollar’s downward trajectory against the greenback.

US Dollar Strengthens on Dimming Fed Rate Cut Expectations

The US Dollar Index, tracking the currency’s performance against six major peers, sits near 98.40, buoyed by a recalibration of expectations regarding Federal Reserve policy adjustments. Market participants have substantially revised down the likelihood of additional rate reductions in the near term.

November’s employment figures painted a mixed landscape. Nonfarm payroll additions of 64,000 marginally exceeded forecasts, yet October’s data underwent significant downward revision, and the jobless rate edged up to 4.6%—the highest level since 2021. Concurrent weakness in retail sales, which remained flat month-over-month, signaled potential consumer demand softness. Collectively, these indicators suggest a labor market in gradual transition toward equilibrium.

Atlanta Federal Reserve President Raphael Bostic characterized the employment landscape as providing mixed signals that do not substantially alter the economic outlook. He emphasized maintaining current rate settings, while simultaneously cautioning against premature declarations of victory over inflation. Bostic flagged multiple surveys indicating elevated input cost pressures and noted that firms are defending profit margins through pricing mechanisms. He underscored that price acceleration stems from multiple sources beyond tariff impacts, projecting 2026 GDP growth at approximately 2.5%.

Federal policymakers remain internally divided on whether additional monetary accommodation is warranted in 2026. The median policy maker pencils in just a single rate reduction next year, though several envision no cuts whatsoever. Market pricing, however, anticipates two adjustments. The CME FedWatch tool indicates that interest rate futures are currently pricing a 74.4% probability of unchanged rates at January’s policy decision, up from roughly 70% one week prior.

Mixed Signals from China’s Economic Performance

China’s November retail sales rose 1.3% year-over-year, falling notably short of the 2.9% expectation and October’s 2.9% result. Industrial production expanded 4.8% annually, marginally below the 5.0% forecast and prior 4.9% reading. Fixed asset investment declined 2.6% year-to-date, overshooting the consensus miss of 2.3% relative to October’s 1.7% contraction.

Australia’s Economic Indicators Paint a Nuanced Picture

The Australian manufacturing sector showed marginal improvement, with S&P Global’s preliminary PMI advancing to 52.2 in December from 51.6 in November. The services component, however, retreated to 51.0 from 52.8, while the composite measure fell to 51.1 from 52.6, suggesting underlying economic momentum is stabilizing rather than accelerating.

The Australian Bureau of Statistics reported that November’s jobless rate remained anchored at 4.3%, outperforming consensus expectations of 4.4%. Employment change arrived at minus 21,300, a substantial reversal from October’s revised gain of 41,100 and well below the 20,000 forecast, hinting at labor market softness entering year-end.

Technical Breakdown Points toward 0.6500

From a technical perspective, AUD/USD has surrendered the 0.6600 threshold and now trades beneath the ascending channel that previously defined its bullish trajectory. The pair’s position below the nine-day exponential moving average at 0.6619 signals weakening short-term momentum.

Immediate downside risks target the psychologically significant 0.6500 level, with support potentially capitulating toward the six-month nadir of 0.6414 established on August 21. Conversely, a recovery above 0.6619 could reignite bullish positioning, potentially propelling the pair toward the three-month high of 0.6685 and the October 2024 peak of 0.6707. Sustained upward momentum would target the upper channel boundary near 0.6760.

Currency Relative Strength Assessment

Among major currency pairs tracked, the Australian Dollar exhibited the most pronounced weakness relative to the Japanese Yen, while maintaining fractional losses against the Euro and sterling. This comparative underperformance underscores the currency’s vulnerability despite supportive domestic policy signals.