AUD Struggles Despite Inflation Signals as Markets Eye February Rate Hike Possibilities

The Australian Dollar continues its downward trajectory against the US Dollar, marking six consecutive days of losses despite economic signals that could support a more hawkish Reserve Bank of Australia stance. While inflation expectations have climbed to 4.7% in December—up from November’s three-month trough of 4.5%—the currency remains under pressure as investors grapple with divergent central bank policy trajectories across the Pacific.

Market Reaction to RBA Hawkishness Remains Muted

Interestingly, the AUD/USD pair fails to capitalize on improving inflation data that could accelerate RBA tightening timelines. Major Australian financial institutions, including Commonwealth Bank and National Australia Bank, have revised their forecasts to anticipate rate hikes beginning as early as February—sooner than previously expected. The swap markets reflect this sentiment, pricing in a 28% probability of a February rate increase, with March carrying nearly 41% odds.

The RBA’s hawkish hold at its final 2025 meeting last week reinforced expectations of tighter monetary policy ahead, yet the currency has not sustained meaningful gains. This paradox reflects a broader market dynamic: while Australian rate hikes appear increasingly probable, the global backdrop—particularly US monetary policy direction—weighs more heavily on AUD sentiment than domestic inflation developments.

US Dollar Finds Refuge Amid Uncertain Rate Cut Outlook

The US Dollar Index, which tracks the greenback against six major currencies, holds firm around 98.40 as prospects for additional Federal Reserve rate cuts fade considerably. Recent labor market data presented a mixed picture: November payrolls expanded by 64K (slightly above forecasts), yet October figures were revised sharply lower and the unemployment rate climbed to 4.6%—the highest level since 2021.

Atlanta Federal Reserve President Raphael Bostic emphasized that “multiple surveys” point to elevated input costs and corporate margin-preservation strategies through price increases. His assertion that “price pressures extend beyond tariffs alone” and his 2026 GDP projection of approximately 2.5% suggest the Fed remains cautious about premature rate cut celebrations.

Fed officials display sharp divergence regarding 2026 monetary easing. The median projection pencils in just one rate reduction next year, while some policymakers foresee no cuts whatsoever. Meanwhile, financial markets anticipate two reductions. The CME FedWatch tool indicates a 74.4% implied probability of a hold at January’s FOMC meeting, up from roughly 70% a week prior.

Global Economic Headwinds Add Complexity

China’s economic momentum showed signs of weakness, with Retail Sales rising merely 1.3% year-over-year in November (versus 2.9% anticipated and 2.9% recorded previously). Industrial Production expanded 4.8% annually, falling short of the 5.0% forecast despite October’s 4.9% performance. Fixed Asset Investment deteriorated to -2.6% year-to-date, missing the expected -2.3% figure.

Domestically, Australia’s preliminary S&P Global Manufacturing PMI edged upward to 52.2 in December from 51.6, though Services PMI slipped to 51.0 from 52.8, and Composite PMI declined to 51.1 from 52.6. The unemployment rate remained steady at 4.3% in November, beating consensus expectations of 4.4%, though employment change figures contracted by 21.3K after October’s revised gain of 41.1K.

Technical Positioning Suggests Further Downside Risk

The AUD/USD pair trades below the 0.6600 confluence support zone, having broken through an ascending channel trend and fallen beneath the nine-day Exponential Moving Average (EMA) at 0.6619. This technical deterioration signals weakening bullish momentum in the near term.

On the downside, the pair could extend losses toward the psychological 0.6500 level, with the six-month low of 0.6414 (set August 21) providing a secondary support target. A stabilization and rebound would require recapturing the nine-day EMA, followed by a return to the ascending channel. Above that resistance, the three-month high of 0.6685 presents the next hurdle, with 0.6707 (the strongest level since October 2024) and the upper channel boundary near 0.6760 representing extended upside targets.

Currency Performance Snapshot

The Australian Dollar emerged as the weakest performer among major currencies, declining 0.19% against the US Dollar despite appreciating modestly against several peers. Against the Japanese Yen, the AUD registered its most significant losses, underscoring the market’s current risk-off sentiment and flight-to-safety flows that benefit both the USD and JPY.

Current intra-day moves reveal the AUD down 0.07% against the USD, while the broader FX landscape reflects choppy conditions across rates markets as investors await further clarity on both Fed and RBA policy divergence.