Australian Dollar Faces Headwinds: Why Inflation Data Isn't Enough to Reverse the Downtrend

The Australian Dollar has surrendered ground for six consecutive trading days against its US counterpart, testing critical support levels despite economic signals that might typically support the currency. This apparent disconnect between economic fundamentals and currency performance tells a compelling story about competing forces in global currency markets and offers important insights for AUD forecast models heading into the coming months.

RBA’s Hawkish Pivot: A Double-Edged Sword

Australia’s inflation expectations offered encouraging news on the surface. Consumer Inflation Expectations climbed to 4.7% in December, marking a recovery from November’s three-month low of 4.5%. On the face of it, this should energize the Australian Dollar. After all, elevated inflation typically attracts investors seeking higher yields and supports central bank hawkishness.

Indeed, the Reserve Bank of Australia’s recent posture has turned distinctly more aggressive. The central bank held rates steady at its final 2025 meeting, but the tone proved decidedly hawkish. Major Australian banks—Commonwealth Bank and National Australia Bank—have recalibrated their forecasts, now expecting the RBA to commence its tightening cycle sooner than previously anticipated. This reassessment reflects their assessment of stubborn inflation persisting within a capacity-constrained economy.

The derivatives market has priced in meaningful probability of an RBA rate increase as soon as February, with swaps suggesting a 28% chance of that move materializing. March sees even higher odds at 41%, while August is nearly fully priced for a hike. Yet despite these hawkish signals, the AUD remains under pressure. The disconnect hints at broader currents pulling the currency lower.

The US Dollar’s Dual Advantage

While the Australian Dollar struggles, the US Dollar Index—which measures greenback performance against six major currencies—continues to find its footing around 98.40. The USD’s resilience stems not from economic strength, but rather from the erosion of expectations for further Federal Reserve easing.

December’s US employment report painted a decidedly mixed picture. Payroll growth came in at 64,000, marginally exceeding forecasts, yet October’s figures underwent substantial downward revision. The unemployment rate ticked up to 4.6%, its highest level since 2021, suggesting the labor market is gradually cooling. Consumer demand, meanwhile, shows signs of fatigue, with retail sales flat month-over-month.

Atlanta Federal Reserve President Raphael Bostic acknowledged this mixed backdrop in a Tuesday blog post, noting that the jobs report offered conflicting signals. He indicated preference for unchanged rates at the Fed’s final 2025 meeting. However, Bostic also emphasized a critical constraint: “multiple surveys” point to elevated input costs, and firms remain determined to defend profit margins through price increases. His commentary underscores why the Fed remains cautious: “Price pressures extend beyond tariff impacts, and the central bank should not prematurely declare victory.”

The Fed finds itself divided on the appropriate course for 2026. The median Fed official projects just one rate reduction next year, though some policymakers argue for no cuts at all. Market traders, by contrast, anticipate two cuts. The CME FedWatch tool captures this uncertainty, showing derivatives pricing an implied 74.4% probability of unchanged rates at January’s FOMC meeting—up from roughly 70% a week prior.

This divergence matters profoundly for AUD/USD dynamics. As long as Fed rate-cut expectations fade, the US Dollar receives a structural bid, creating headwinds for the Australian Dollar despite the RBA’s hawkish messaging.

Global Growth Concerns Weigh on Risk Assets

Additional pressure on commodity-linked currencies like the Australian Dollar emerges from slowing global growth indicators. China, Australia’s largest trading partner, released disappointing economic data on Monday through the National Bureau of Statistics.

Chinese Retail Sales advanced just 1.3% year-over-year in November, substantially missing the 2.9% forecast and the prior month’s 2.9% pace. Industrial Production, though steadier at 4.8%, underperformed the 5.0% projection. More concerning, Fixed Asset Investment deteriorated to -2.6% year-to-date for November, below the expected -2.3% and worsening from October’s -1.7%. These figures collectively suggest softening momentum in the world’s second-largest economy.

On the Australian side, the labor market showed cracks in recent months. Employment Change registered -21.3K in November, a stark reversal from October’s 41.1K gain (revised). The Unemployment Rate, however, held steady at 4.3%, below consensus expectations of 4.4%.

Manufacturing activity presented mixed signals. Australia’s preliminary S&P Global Manufacturing PMI edged higher to 52.2 in December from 51.6, remaining in expansionary territory. The Services PMI, however, slipped from 52.8 to 51.0, and the Composite PMI fell to 51.1 from 52.6. This suggests the services sector, a critical component of the Australian economy, may be losing momentum.

Technical Analysis and the AUD Forecast Outlook

From a technical perspective, the AUD/USD pair trades below 0.6600, a critical confluence support zone. Daily chart analysis reveals the pair has slipped beneath the ascending channel trend that previously anchored bullish positioning. The pair now trades below its nine-day Exponential Moving Average, signaling deteriorating short-term momentum.

The downside trajectory suggests testing toward the psychological 0.6500 level in the near term. A sustained breakdown could carry the pair toward the six-month low of 0.6414, established on August 21. This level looms as the next significant barrier for those expecting further weakness.

On the recovery side, the nine-day EMA sits at 0.6619, offering the first resistance point for any rebound. A sustained move above this level would require closing back within the ascending channel, potentially reviving the bullish bias that dominated earlier in the year. From there, the pair could test the three-month high of 0.6685, followed by 0.6707 (the highest level since October 2024). A decisive break of these levels would target the upper channel boundary near 0.6760.

For investors developing an AUD forecast, the technical picture suggests patience may be warranted. While the RBA’s hawkish tilt provides a floor beneath the currency, the Fed’s rate-cut reversal and slowing global growth provide immediate overhead resistance. Momentum remains negative in the short term, though longer-term AUD strength likely requires either a significant divergence in Fed policy or a meaningful reacceleration in Chinese economic activity.

Currency Strength Snapshot

The Australian Dollar weakness extends across most major currency pairs. Against the Japanese Yen, the AUD underperformed most severely on Thursday, reflecting broader appetite for safe-haven positions. The heat map of intraday currency movements illustrates the degree to which the Australian Dollar lost ground relative to peers, with losses ranging from modest (0.05-0.10%) against the Euro and Pound to more significant declines (0.17%) when measured against the Canadian Dollar.