AUD Weakens Despite Inflation Signals as Dollar Strength Dominates Currency Markets

Australian Dollar tumbles to sixth consecutive day of losses, defying hawkish inflation expectations and growing RBA tightening odds. The Australian Dollar struggles against the US Dollar for the sixth day running, trading below the critical 0.6600 support level. While inflation pressures mount in Australia—with Consumer Inflation Expectations climbing to 4.7% in December from 4.5% in November—the AUD fails to capitalize on signals pointing to potential Reserve Bank of Australia rate hikes as early as February.

Market watchers noted that equivalent currency movements, such as 20k pounds to dollars conversions, highlight how major central bank policy divergence shapes broader forex dynamics. The disparity between RBA tightening prospects and Federal Reserve pause expectations creates the underlying tension driving AUD/USD weakness.

RBA Rate Hike Bets Intensify But Fail to Support Currency

Australia’s two major banks—Commonwealth Bank and National Australia Bank—now forecast RBA tightening sooner than previously expected, citing persistent inflation in a capacity-constrained economy. Swap markets currently price a 28% probability of a February rate move, nearly 41% for March, with August almost fully priced in. The RBA’s hawkish hold at its final 2025 meeting last week reinforced these expectations.

However, this hawkish backdrop hasn’t translated into AUD strength. Instead, the currency finds itself wrestling with broader dollar momentum driven by divergent Fed expectations.

US Dollar Captures Safe-Haven Bids Amid Uncertain Rate Path

The US Dollar Index holds steady around 98.40, buoyed by fading expectations for additional Federal Reserve rate cuts. While the November US jobs report showed payroll growth of 64K—slightly above estimates—October figures saw sharp downward revisions. The unemployment rate climbed to 4.6%, marking its highest level since 2021, signaling a gradually cooling labor market.

Retail sales stalled month-over-month, reinforcing signs that consumer demand is softening. Atlanta Fed President Raphael Bostic acknowledged mixed signals from employment data but warned against premature declarations of victory on price pressures. Bostic highlighted that “multiple surveys” point to elevated input costs, with firms determined to preserve margins through pricing power. He cautioned that “price pressures extend beyond tariffs alone,” and projected 2026 GDP growth around 2.5%.

Fed officials remain divided on 2026 easing prospects. The median projection suggests just one rate cut next year, while some policymakers see no further reductions. Traders, however, anticipate two cuts. The CME FedWatch tool shows fed funds futures pricing a 74.4% probability of unchanged rates at January’s FOMC meeting, up from roughly 70% a week prior.

China’s Economic Momentum Slowing Across Key Indicators

China’s growth narrative weakened in November data releases. Retail Sales rose merely 1.3% year-over-year versus 2.9% expected and 2.9% in October. Industrial Production increased 4.8% year-over-year against forecasts of 5.0% and prior 4.9%. Fixed Asset Investment deteriorated to -2.6% year-to-date year-over-year, missing the expected -2.3% and deteriorating from October’s -1.7%.

This softening in China’s economic engine adds another headwind for risk-sensitive currencies like the Australian Dollar.

Australia’s PMI and Employment Paint Mixed Picture

Australia’s S&P Global Manufacturing PMI edged up to 52.2 in December from 51.6, suggesting modest expansion. However, the Services PMI slipped to 51.0 from 52.8, while the Composite PMI declined to 51.1 from 52.6—both signaling broadening weakness across the services sector.

On the labor front, the Unemployment Rate held steady at 4.3% in November, beating the 4.4% consensus. Yet Employment Change came in at -21.3K versus October’s 41.1K (revised from 42.2K), significantly missing the 20K forecast and raising questions about labor market resilience.

Technical Breakdown Signals Further AUD Downside

The AUD/USD pair trades below the ascending channel trend on daily charts, reflecting deteriorating bullish momentum. The pair sits beneath the nine-day Exponential Moving Average at 0.6619, indicating weakening short-term price action.

Downside targets include the psychological 0.6500 level, followed by the six-month low of 0.6414 established on August 21. A sustained break below these levels could accelerate selling pressure.

Conversely, a rebound toward the nine-day EMA at 0.6619 could test the three-month high of 0.6685, with further strength potentially reaching 0.6707 (highest since October 2024). Breach above this resistance would target the upper ascending channel boundary near 0.6760.

Currency Performance Snapshot

Today’s forex moves show the Australian Dollar as the weakest performer against the Japanese Yen, underscoring risk-off sentiment. The USD posted gains of 0.19% versus AUD, reflecting the divergent policy outlook between the Federal Reserve’s patience and market expectations for RBA action.

The current configuration—RBA hawkishness offset by Fed pause expectations and broader dollar strength—leaves AUD/USD vulnerable to further deterioration unless inflation prints cool faster than anticipated or Fed rate cut bets accelerate.