Why Australian Dollar Struggles Against USD Despite Hawkish RBA Signals—A Closer Look at AUD/USD Dynamics

The Paradox: Rising Inflation Expectations Don’t Help the Australian Dollar

The Australian Dollar continues its downward trajectory, marking the sixth consecutive trading session of weakness against the US Dollar. On the surface, this seems counterintuitive—Australia’s Consumer Inflation Expectations climbed to 4.7% in December from 4.5% in November, a move that typically signals tighter monetary policy ahead. Indeed, major banks including Commonwealth and National Australia Bank have revised their forecasts to reflect an earlier Reserve Bank of Australia (RBA) rate hike, potentially arriving as soon as February. Market pricing now reflects a 28% probability of a February rate lift, jumping to nearly 41% for March.

Yet despite these hawkish signals, investors are not flocking to the Australian Dollar. The currency pair AUD/USD has broken below the critical 0.6600 support level, suggesting that other forces are overwhelming the inflation-driven case for tighter Australian policy.

The Real Driver: US Dollar Strength Rooted in Fed Pause Expectations

The divergence between the two central banks is the missing piece. While the RBA is moving toward rate hikes due to stubborn inflation in a capacity-constrained economy, the Federal Reserve is signaling a pause in its cutting cycle. The US Dollar Index (DXY) is holding firm near 98.40, benefiting from diminishing market expectations of additional Fed rate cuts.

Recent US economic data has painted a mixed picture. November’s payroll report revealed 64K jobs added, marginally exceeding forecasts, but previous months were revised sharply downward. The unemployment rate ticked up to 4.6%, the highest level since 2021, indicating a gradual cooling of labor market momentum. Retail sales came in flat month-over-month, further reinforcing the narrative of slowing consumer demand.

Even so, Fed officials remain cautious about easing further. Atlanta Federal Reserve President Raphael Bostic highlighted that price pressures remain entrenched, with firms determined to protect margins through price increases rather than accepting lower profits. His warning that “the Fed should not be hasty to declare victory” on inflation reflects the central bank’s hawkish hold at its final 2025 meeting.

CME FedWatch data underscores investor sentiment: there is now a 74.4% probability that the Fed will hold rates steady at its January meeting, up from 70% a week prior. While traders anticipate two rate cuts in 2026, Fed officials have signaled only one reduction, with some policymakers projecting zero cuts. This divergence between market expectations and Fed guidance is supporting the US Dollar, creating headwinds for the Australian Dollar.

Asian Growth Concerns Add Another Layer

Adding complexity to the outlook, China’s economic data disappointed in November. Retail Sales expanded just 1.3% year-over-year, significantly below the 2.9% forecast. Industrial Production came in at 4.8%, missing the 5.0% estimate. Most concerning, Fixed Asset Investment contracted 2.6% year-to-date, worse than the expected -2.3% decline. Weakness in China—Australia’s largest trading partner—raises questions about sustained demand for Australian commodities and growth prospects, weighing on AUD/USD sentiment.

Meanwhile, Australia’s own data showed mixed signals. The Manufacturing PMI edged up to 52.2 in December, while Services PMI fell to 51.0 from 52.8. The Composite PMI declined to 51.1 from 52.6. These readings suggest manufacturing resilience but services sector softness. The unemployment rate held steady at 4.3% in November, beating expectations of 4.4%, but employment fell by 21.3K after rising 41.1K in October, signaling labor market fragility.

Technical Picture: Breaking Key Support Levels

From a technical standpoint, AUD/USD has pierced the confluence support zone at 0.6600 and is now trading below the nine-day Exponential Moving Average (EMA) at 0.6619. The pair is also positioned below its ascending channel trend line, suggesting weakening bullish momentum.

The downside path appears clearer in the near term. The psychological level of 0.6500 looms as the next target, followed by the six-month low of 0.6414 recorded on August 21. A break below these levels could accelerate selling pressure.

On the upside, a rebound would first need to reclaim the nine-day EMA, then test the three-month high of 0.6685. Further strength could see the pair approach 0.6707, the highest level since October 2024, with the upper ascending channel boundary around 0.6760 representing a major resistance point to watch.

The Verdict: Policy Divergence Trumps Inflation Data

The Australian Dollar’s struggle against the US Dollar reflects a broader truth in currency markets: relative monetary policy expectations often outweigh domestic inflation signals. While RBA rate hike probabilities have risen due to persistent inflation expectations, the Fed’s reluctance to cut aggressively and signals of a policy pause are providing stronger support to the US Dollar. Until this divergence shifts—either with the Fed moving closer to cuts or the RBA disappointing on hike timing—the Australian Dollar is likely to face headwinds in the USD pair.

Investors tracking AUD/USD should monitor upcoming Fed commentary and RBA communications closely, as shifts in either central bank’s stance could reshape this dynamic significantly.