AUD Struggles to Find Traction Despite Hawkish RBA Signals Amid Persistent Inflation

The Australian Dollar is grinding lower against its US counterpart for the sixth consecutive trading session, even as expectations mount for an earlier-than-anticipated rate hike from the Reserve Bank of Australia. Markets are digesting conflicting signals—a lift in consumer inflation expectations should theoretically support the currency, yet the greenback’s resilience is weighing heavily.

Inflation Expectations Rise, But Market Dynamics Tell a Different Story

Australia’s consumer inflation expectations ticked up to 4.7% in December, recovering from November’s three-month low of 4.5%. On the surface, this reading should encourage the RBA to act more aggressively, and major financial institutions agree. Commonwealth Bank of Australia and National Australia Bank have both revised their forecasts to project an RBA rate increase as early as February—a shift that reflects confidence in the central bank’s hawkish positioning following its final 2025 meeting.

Market pricing reflects this conviction. Swaps currently assign a 28% probability to a February hike, with March carrying nearly 41% odds. By August, the market is almost fully pricing in tightening. Yet despite these bullish signals for the Aussie, the currency continues its slide, suggesting that other factors are dominating trader sentiment.

The Dollar’s Strength Overshadows RBA Hawks

The real story lies on the other side of the equation. The US Dollar Index, measuring the greenback’s performance against six major currencies, is holding firm around the 98.40 level. Strength in USD has become the dominant theme, driven by diminishing expectations of further Federal Reserve rate cuts—a narrative that continues to support currency pairs where the dollar plays the quote role.

Recent US economic data painted a mixed picture. November payroll growth came in at 64K, marginally exceeding forecasts, but October figures faced a sharp downward revision. The unemployment rate rose to 4.6%, marking its highest level since 2021, which typically signals a cooling labor market. Retail sales posted a flat reading month-over-month, reinforcing signals that consumer demand is losing momentum. When converted, 103 USD to CAD reflects the broader greenback strength narrative, as strong dollars tend to appreciate across multiple currency pairs.

Federal Reserve policymakers remain divided on the path forward. The median official projection shows just one rate cut for 2026, while some officials see no cuts at all. Traders, however, anticipate two cuts. The CME FedWatch tool now shows a 74.4% probability of the Fed holding rates steady at its January meeting, up from roughly 70% a week prior.

Atlanta Fed President Raphael Bostic weighed in via a blog post, describing the jobs report as a “mixed picture” that doesn’t alter the outlook. He signaled a preference for unchanged rates at the latest meeting, while cautioning that price pressures remain stubborn—driven by both tariff dynamics and firms’ margin-preservation efforts. His 2.5% GDP forecast for 2026 underscores modest growth expectations.

Economic Data Across the Pacific Adds to Headwinds

Chinese economic indicators have also disappointed. November retail sales rose just 1.3% year-over-year, missing the 2.9% expectation. Industrial production climbed 4.8%, falling short of the 5.0% forecast. Fixed asset investment declined 2.6% year-to-date, missing expectations of a -2.3% figure. These softer readings from China’s economy weigh on risk appetite and support the safe-haven appeal of USD strength.

Australia’s domestic data showed mixed signals. The preliminary S&P Global Manufacturing PMI edged up to 52.2 in December from 51.6, suggesting modest improvement. However, the Services PMI slipped to 51.0 from 52.8, and the Composite PMI fell to 51.1 from 52.6. Separately, the unemployment rate held steady at 4.3% in November, beating the 4.4% consensus. Yet employment change printed at -21.3K, a sharp reversal from October’s upward revision to 41.1K.

Technical Breakdown Points to Further Downside Risks

From a technical perspective, the AUD/USD pair has broken below the critical 0.6600 support zone. The daily chart reveals the pair trading beneath an ascending channel trend, signaling weakening bullish momentum. The nine-day Exponential Moving Average sits at 0.6619, and the pair has slipped below this level, confirming deteriorating short-term price dynamics.

Bears now have their sights on the 0.6500 psychological level, with the six-month low of 0.6414 (recorded August 21) serving as a potential target if selling pressure intensifies. Should the AUD stabilize and recover, the first resistance would emerge at the nine-day EMA around 0.6619. A sustained push higher could challenge the three-month peak of 0.6685, with 0.6707 (the highest level since October 2024) as the next objective. A break above the upper ascending channel boundary near 0.6760 would be needed to fully restore the bullish narrative.

The Australian Dollar’s weakness reflects a classic currency dynamic: despite domestic factors supporting AUD appreciation, the gravitational pull of USD strength remains too formidable to overcome in the near term. Traders appear to be prioritizing Fed policy divergence and greenback safe-haven appeal over the prospect of RBA tightening.