Can the Australian Dollar Recover Despite Inflation Pressures? AUD/USD at Critical Juncture

The Australian Dollar continues its downward trajectory against the US Dollar, marking the sixth consecutive day of losses as traders reassess rate expectations and macro headwinds. While growing inflation expectations could support an RBA rate hike as early as February, the immediate support appears insufficient to reverse the AUD’s weakening trend.

Rising Inflation Expectations Fuel RBA Hawkish Bets

Australia’s Consumer Inflation Expectations climbed to 4.7% in December, recovering from November’s three-month low of 4.5%. This uptick strengthens the case for earlier monetary tightening by the Reserve Bank of Australia, particularly following the central bank’s hawkish hold on rates at its final 2025 meeting.

Major Australian banks are now revising their forecasts upward. Commonwealth Bank of Australia and National Australia Bank both anticipate the RBA will begin tightening sooner than previously expected, citing persistent inflation in a capacity-constrained economy. Market swaps currently price a 28% probability of a February rate hike, nearly 41% for March, with August almost fully priced in—a significant shift from earlier assumptions.

However, this hawkish positioning for the Reserve Bank of Australia has not yet provided substantial support to the Australian Dollar to USD exchange rates, suggesting that other macro factors are weighing more heavily on sentiment.

US Dollar Strength Driven by Fed Rate Cut Skepticism

The US Dollar Index (DXY), measuring the greenback’s performance against six major currencies, holds steady around 98.40, buoyed by diminishing expectations of additional Federal Reserve cuts. The latest US employment data painted a mixed picture: November payroll growth came in at 64K, slightly above forecasts, but October figures were revised sharply downward. The unemployment rate ticked up to 4.6%, the highest level since 2021, signaling a gradually cooling labor market.

Retail sales remained flat month-over-month, reinforcing signs that consumer demand is losing steam. Yet these signals have not convinced Fed officials to commit to further easing. Atlanta Fed President Raphael Bostic emphasized that the jobs report presented conflicting signals and did not materially alter the outlook. Bostic flagged rising input costs and firm-level margin pressures, cautioning that “Price pressures are not just coming from tariffs, the Fed should not be hasty to declare victory.”

Fed policymakers remain divided on 2026 easing. The median official projects just one rate cut next year, while some see no further reductions at all. Traders, by contrast, anticipate two cuts. The CME FedWatch tool shows Fed funds futures pricing a 74.4% probability of holding rates steady at the January meeting, up from 70% a week prior.

Asia-Pacific Data Shows Weakness

China’s economic momentum continued to soften in November. Retail Sales rose only 1.3% year-over-year, well below the 2.9% forecast and October’s 2.9% reading. Industrial Production increased 4.8% annually, missing the 5.0% forecast and prior 4.9% figure. Fixed Asset Investment disappointed at -2.6% year-to-date, undershooting the expected -2.3% and deteriorating from October’s -1.7%.

On the domestic front, Australia’s preliminary S&P Global Manufacturing PMI edged up to 52.2 in December from 51.6, a modest gain. However, the Services PMI contracted to 51.0 from 52.8, while the Composite PMI fell to 51.1 from 52.6, signaling mixed momentum across the economy. The Australian Bureau of Statistics reported that the Unemployment Rate held steady at 4.3% in November, beating the 4.4% consensus, though Employment Change fell by 21.3K versus October’s revised 41.1K—a sharp reversal from the prior month’s gains.

AUD/USD Technical Outlook: Support Levels in Focus

The AUD/USD pair is currently trading below the 0.6600 level, having broken below the ascending channel trend on the daily timeframe. The pair also trades beneath the nine-day Exponential Moving Average (EMA), indicating weakened short-term momentum.

Downside risks are significant. The Australian Dollar to USD cross could test the psychological 0.6500 level next, followed by the six-month low of 0.6414 set on August 21. On the upside, recovery would first encounter the nine-day EMA around 0.6619. A sustained bounce above this level could inspire a retest of the three-month high at 0.6685 and the October 2024 peak near 0.6707. Further advances would target the upper ascending channel boundary near 0.6760.

Currency Performance Snapshot

Across the major currency complex, the Australian Dollar ranked among the weakest performers today, particularly against the Japanese Yen. While minor moves characterized USD action versus the Euro and Pound, the Australian Dollar to USD spread widened, reflecting investor caution ahead of key central bank decisions from both the Federal Reserve and the Reserve Bank of Australia.