RBA Rate Hike Prospects Support Australian Dollar Despite Ongoing Weakness Against US Dollar

The Australian Dollar continues its sixth consecutive day of decline against the US Dollar, yet emerging signals suggest a potential floor may be forming as markets digest shifting monetary policy expectations between the Reserve Bank of Australia and the Federal Reserve.

Inflation Expectations Fuel RBA Tightening Bets

Australia’s Consumer Inflation Expectations climbed to 4.7% in December, rebounding from November’s three-month trough of 4.5%. This uptick strengthens the case for Reserve Bank of Australia action, with major financial institutions—Commonwealth Bank of Australia and National Australia Bank—now forecasting rate increases as early as February 2025. The central bank’s hawkish stance at its December meeting underscores officials’ determination to tackle persistent inflationary pressures within a capacity-constrained economy.

Market pricing reflects this shifting outlook: derivative contracts now assign a 28% probability to a February rate hike, nearly 41% odds for March, with August essentially fully priced in for tightening moves. This contrasts sharply with previous expectations and signals the AUD could find footing if rate-sensitive traders adjust positioning accordingly.

US Dollar Holds Ground on Fed Rate Cut Uncertainty

The US Dollar Index, tracking the greenback’s performance against six major currencies, maintains strength around the 98.40 level as market participants pare back expectations for additional Federal Reserve monetary easing. This reassessment follows a complicated employment picture: November nonfarm payrolls expanded by 64,000—slightly exceeding forecasts—yet October figures faced substantial downward revision. The unemployment rate simultaneously rose to 4.6%, marking its highest level since 2021, suggesting labor market cooling.

Atlanta Fed President Raphael Bostic highlighted this mixed backdrop, noting that elevated input costs and corporate margin-defense strategies continue generating price pressures. He cautioned against premature declarations of victory over inflation and penciled in 2026 GDP growth of approximately 2.5%. Among Fed officials, consensus fragments over 2026 easing: the median projection suggests just one rate reduction, while some policymakers see no cuts warranted. Traders, however, anticipate two reductions, creating tension between official guidance and market expectations.

The CME FedWatch instrument currently prices 74.4% odds of a rate hold at the January Federal Reserve meeting, up from roughly 70% a week earlier, underscoring diminishing confidence in near-term easing.

Economic Data Divergence Between Major Economies

China’s November data presented headwinds for risk sentiment: Retail Sales expanded 1.3% year-over-year versus the 2.9% forecast, while Industrial Production rose 4.8% year-over-year, trailing the 5.0% consensus. Fixed Asset Investment fell into deeper contraction at -2.6% year-to-date year-over-year, disappointing relative to the -2.3% expectation.

Australia’s December manufacturing activity painted a more resilient picture. The preliminary S&P Global Manufacturing PMI edged upward to 52.2 from 51.6, though Services PMI slipped to 51.0 from 52.8, while the Composite index declined to 51.1 from 52.6. The Australian Bureau of Statistics reported the Unemployment Rate holding steady at 4.3% in November—below consensus at 4.4%—though Employment Change delivered a surprise contraction of 21,300 positions compared to October’s revised 41,100 gain.

Technical Setup Suggests Downside Risk Before Support Emerges

The AUD/USD pair currently trades beneath the critical 0.6600 level, positioning itself below the ascending channel trend that previously supported bullish momentum. With the pair trading beneath its nine-day Exponential Moving Average, short-term price momentum has weakened considerably.

Initial downside targets include the psychological 0.6500 barrier, with the six-month low of 0.6414—established on August 21—representing deeper support. For context, converting 20k AUD to USD at current levels illustrates the magnitude of recent depreciation: the same Australian Dollar amount now yields fewer US Dollars than in earlier months, highlighting the currency’s weakness.

On the recovery side, a rebound toward the nine-day EMA at 0.6619 would reactivate the ascending channel structure and potentially signal movement toward the three-month high of 0.6685, followed by 0.6707 (the highest since October 2024). Sustained advances would encounter the upper channel boundary near 0.6760.

Currency Performance Heat Map

The Australian Dollar registered the weakest performance against the Japanese Yen among major currency pairs, declining 0.27% in the daily cross-rate comparison. Against the US Dollar, the AUD weakened 0.19%, while showing similar depreciation relative to the Canadian Dollar (0.10%), British Pound (0.05%), and Euro (0.07%), though it slightly outperformed the Swiss Franc on the session.

The technical and fundamental backdrop suggests the Australian Dollar faces near-term headwinds, yet the emerging RBA tightening cycle provides eventual support, contrasting with the Federal Reserve’s gradual approach to easing.