AUD Under Pressure Amid Mixed Signals—RBA Rate Hike Bets Rise Despite Inflation Uncertainty

The Australian Dollar has declined for six consecutive trading sessions against the US Dollar on Thursday, signaling sustained downward momentum in the currency pair. While Australia’s inflation expectations landscape continues to evolve, with consumer surveys indicating a reading of 4.7% in December—up from November’s 4.5% low—investors remain conflicted about whether such data will accelerate central bank action in the coming months.

Hawkish RBA Signals Clash with Persistent Economic Uncertainty

The Reserve Bank of Australia’s recent policy stance has sparked renewed speculation among major financial institutions about earlier-than-expected rate increases. Both Commonwealth Bank of Australia and National Australia Bank have adjusted their forecasts, now pricing in the possibility of tightening as soon as February. The swap markets currently assign a 28% probability to a February rate hike, with March expectations reaching approximately 41% and August nearly fully priced in.

This shift reflects growing recognition that Australia’s inflation problem stems partly from supply-side constraints in a tight labor market. The central bank’s hawkish hold at its December 2024 meeting reinforced this narrative, though broader economic indicators paint a more nuanced picture. For traders managing AUD exposure—whether converting 500 Australian dollars in pounds or assessing larger institutional positions—these divergent signals create both opportunities and risks.

Australia’s employment landscape added another layer of complexity in November, with the jobless rate holding steady at 4.3%, marginally better than the forecasted 4.4%. However, employment changes revealed weakness, with November posting a 21,300-job decline compared to October’s upwardly revised 41,100-job gain. This employment volatility underscores the broader challenge: inflation remains sticky despite gradually cooling labor demand.

US Dollar Strengthens as Fed Rate-Cut Hopes Diminish

Meanwhile, the US Dollar has found stability near the 98.40 level on the US Dollar Index (DXY), benefiting from fading expectations of additional Federal Reserve rate cuts. The December jobs report painted a mixed tableau—non-farm payrolls increased by 64,000 jobs, slightly above consensus, yet prior-month revisions were substantially downward, and the jobless rate climbed to 4.6%, marking the highest level since 2021.

Atlanta Federal Reserve President Raphael Bostic recently indicated that existing monetary conditions may remain appropriate longer than anticipated. His commentary highlighted that firms continue to resist margin compression through price increases, with “multiple surveys” pointing to elevated input costs. He cautioned against premature policy normalization, noting that “price pressures extend beyond tariff impacts,” and suggested 2026 GDP growth might settle around 2.5%.

Fed officials currently hold divergent views on 2026 rate policy. Median projections suggest only a single rate reduction next year, while some policymakers expect no reductions at all. Traders, however, have priced in approximately two cuts, creating a gap between official guidance and market expectations. The CME FedWatch tool now indicates a 74.4% probability that the Federal Reserve will maintain rates unchanged at its January meeting, up from roughly 70% a week prior.

Asia-Pacific Growth Signals Weaken Amid China’s Deflationary Concerns

Chinese economic data released this week has raised fresh questions about regional growth momentum. Retail sales rose just 1.3% year-over-year in November, significantly undershooting the 2.9% expectation and matching October’s downwardly revised print. Industrial production climbed 4.8% annually, trailing the 5.0% forecast and prior 4.9% reading. Fixed asset investment continued deteriorating at -2.6% year-to-date year-over-year, falling short of the expected -2.3% figure and worsening from October’s -1.7% performance.

Australia’s manufacturing and services sectors reflected the region’s mixed trajectory. The S&P Global Manufacturing PMI ticked upward to 52.2 in December from November’s 51.6, yet the Services PMI retreated to 51.0 from the prior 52.8 print. The Composite PMI compressed to 51.1 from 52.6, suggesting modest expansion fragility across the Australian economy.

Technical Analysis: Key Levels Define Near-Term Direction

On the daily timeframe, AUD/USD has broken below the 0.6600 confluence level, falling below the nine-day exponential moving average and weakening its position relative to an ascending trend channel. This repositioning signals diminished bullish commitment in the short term.

Downside targets now come into focus: the psychological 0.6500 level presents initial support, with the six-month floor at 0.6414 (established August 21) offering a more formidable anchor. Above, the nine-day EMA at 0.6619 would need to reclaim to stabilize momentum. A break above this average could allow the pair to test the three-month high of 0.6685, followed by 0.6707—the strongest level since October 2024. Further advances would challenge the upper ascending channel boundary near 0.6760.

Currency Performance Snapshot

The Australian Dollar registered the day’s weakest performance relative to the Japanese Yen, while posting declines against most major counterparts. The currency showed particular softness versus the New Zealand Dollar, with the cross weakening by 0.12%. Against the euro, sterling, and commodity currencies, the Australian unit remained under pressure, underscoring broad-based demand for safe-haven and traditional reserve assets at this juncture.