AUD/USD Struggles to Find Footing as Rate Hike Bets Clash with Broader Dollar Strength

The Australian Dollar continues its downward trajectory against the greenback, posting losses for the sixth consecutive trading session. While inflation expectations climbed to 4.7% in December—up from November’s 4.5% low—the Aussie remains under pressure, signaling that hawkish central bank signals alone may not be enough to support the currency amid a stronger US Dollar environment.

RBA Tightening Prospects Support AUD, But Impact Remains Muted

Recent inflation data has shifted market expectations around the Reserve Bank of Australia’s policy path. Consumer Inflation Expectations rising to 4.7% in December suggests persistent price pressures that could justify earlier rate hikes. Major Australian lenders, Commonwealth Bank of Australia and National Australia Bank, have adjusted their forecasts to reflect a potential RBA rate increase as soon as February, a view reinforced by the central bank’s hawkish stance at its final 2025 meeting.

Market pricing reflects this shift, with swaps data indicating a 28% probability of a February rate move, climbing to nearly 41% for March, and August futures nearly fully priced for tightening. This hawkish repricing should theoretically provide support for the Australian Dollar to USD, yet the currency pair remains pressured by competing dynamics elsewhere in the forex landscape.

US Dollar Remains Resilient Despite Mixed Economic Signals

The US Dollar Index, tracking the greenback’s performance against six major currencies, remains anchored around 98.40, bolstered by diminishing expectations of further Federal Reserve easing. Despite a cooling labor market—highlighted by November’s 64K payroll increase and an unemployment rate rising to 4.6%, the highest since 2021—markets are pricing in minimal additional rate cuts ahead.

Atlanta Fed President Raphael Bostic’s recent commentary emphasized this cautious stance. While acknowledging the mixed nature of recent labor data, he signaled a preference for unchanged rates and highlighted persistent price pressures from input costs and margin preservation across firms. His view that “price pressures are not just coming from tariffs” suggests the Fed should maintain vigilance rather than declare victory over inflation.

Fed officials remain divided on 2026 monetary policy. The median projection suggests just one rate cut, while some officials see no further easing warranted. However, traders anticipate two cuts, creating an expectations gap that supports continued Dollar strength.

Technical Landscape: AUD/USD Trading Below Key Support

From a technical perspective, the AUD/USD pair has broken below the 0.6600 confluence level, trading with weakening momentum as it settles below the nine-day Exponential Moving Average. The pair has exited its ascending channel, signaling a shift toward bearish bias on the daily timeframe.

Downside targets include the 0.6500 psychological level, followed by the six-month low of 0.6414 established in August. Should selling pressure intensify, these levels warrant monitoring for potential support bounces.

On the upside, the nine-day EMA sits at 0.6619 and could provide initial resistance. A sustained recovery above this level and back into the ascending channel would be required to revive bullish interest. Beyond that, the three-month high of 0.6685 and the October 2024 peak near 0.6707 represent higher resistance zones. The upper boundary of the ascending channel near 0.6760 would mark the highest technical hurdle for bulls.

Broader Economic Context: Mixed Signals from Major Economies

Recent economic data from Australia painted a mixed picture. Manufacturing PMI edged higher to 52.2 in December from 51.6, but Services PMI contracted to 51.0 from 52.8, and the Composite reading fell to 51.1 from 52.6. Meanwhile, the Unemployment Rate held steady at 4.3% in November, below consensus expectations of 4.4%, though employment figures turned negative with a 21.3K decline compared to October’s upward revision to 41.1K.

Chinese economic data also showed weakness. November Retail Sales rose just 1.3% year-over-year, missing the 2.9% expectation and October’s 2.9% reading. Industrial Production of 4.8% came in below the 5.0% forecast. Fixed Asset Investment deteriorated to -2.6% year-to-date versus the expected -2.3%, reflecting softening momentum in the world’s second-largest economy.

Currency Performance Snapshot

The Australian Dollar weakened most notably against the Japanese Yen among major currency pairs, reflecting the broader risk-off sentiment supporting safe-haven flows. The currency heat map indicates AUD depreciation across most majors, with particularly steep declines visible against JPY and NZD, while maintaining relatively stability versus EUR and GBP.

The interplay between RBA rate hike expectations and Federal Reserve hesitancy over additional cuts creates a complex backdrop for the AUD/USD pair, with technical breakdown suggesting near-term downside risks remain the primary concern for bulls.