AUD Weakens for Sixth Day Straight as Rate Hike Bets Collide with Inflation Signals

Australian Dollar slides despite rising inflation expectations setting up potential RBA hawkish move. The Australian Dollar continues its downward spiral against the US Dollar, losing ground for the sixth consecutive day. While inflation expectations ticked up to 4.7% in December—a jump from November’s 4.5% low—the Aussie still struggles to find solid footing. For context, when converting 103 euro to AUD at current rates, traders are increasingly watching cross-currency dynamics as traditional support levels weaken.

Major Australian banks Commonwealth Bank and National Australia Bank are now signaling that the Reserve Bank of Australia could tighten monetary policy as soon as February, catching many off guard. The RBA’s hawkish hold last week fueled these expectations, with swap markets currently pricing in a 28% probability of a February rate hike, climbing to 41% for March, and nearly full pricing by August. Yet despite these bullish signals for the Aussie, the currency keeps sliding.

The Dollar Advantage: Fed Rate Cut Hopes Fade

The US Dollar Index sits comfortably around 98.40, drawing strength from cooling Federal Reserve rate cut expectations. Recent US economic data painted a mixed picture: November payrolls came in at 64K (slightly above forecast), but October numbers were revised sharply downward. The unemployment rate climbed to 4.6%—the highest since 2021—signaling labor market softening.

Atlanta Federal Reserve President Raphael Bostic cautioned against premature rate cut declarations, emphasizing that price pressures persist beyond tariff impacts. He penciled in 2026 GDP growth around 2.5%, underscoring a moderating economy. Fed policymakers are fragmented on 2026 rate cuts: the median official expects just one reduction while some see none. Trader positioning differs sharply—they’re betting on two cuts next year.

The CME FedWatch tool reveals that futures traders are now pricing in a 74.4% probability of the Fed holding rates steady at January’s meeting, up from 70% a week prior. This shift away from rate cut bets is directly bolstering dollar strength.

Chinese Growth Stumbles, Adding Pressure to Risk Sentiment

China’s economic data disappointed across the board in November. Retail sales rose just 1.3% year-over-year against a 2.9% forecast, while industrial production hit 4.8% YoY versus the 5.0% expected. Fixed asset investment deteriorated to -2.6% year-to-date, missing the -2.3% consensus.

Australian Data: Manufacturing Steadies, Employment Weakens

Australia’s manufacturing pulse showed modest resilience with the S&P Global Manufacturing PMI edging up to 52.2 in December from 51.6. However, the Services PMI dipped to 51.0 from 52.8, while the broader Composite PMI fell to 51.1 from 52.6. Employment figures painted a darker picture: the November unemployment rate held at 4.3%, but employment contracted by 21.3K—a sharp reversal from October’s 41.1K gain.

Technical Picture: Support Levels Under Siege

AUD/USD now trades below the 0.6600 psychological level, having broken below an ascending channel that previously supported bullish momentum. The pair also sits beneath the nine-day Exponential Moving Average, confirming weaker short-term momentum.

Downside targets loom at 0.6500, followed by the six-month low of 0.6414 set on August 21. A recovery would first need to reclaim the nine-day EMA at 0.6619, then test the three-month high of 0.6685 and 0.6707 (highest since October 2024). If momentum shifts decisively higher, the upper channel boundary near 0.6760 becomes relevant.

The currency landscape remains tilted toward USD strength, with the Australian Dollar caught between hawkish RBA signals and a weaker fundamental picture.