Inflation Surge Fails to Stem Australian Dollar Weakness as RBA Rate Hike Bets Mount

The Australian Dollar continues its downward trajectory, losing ground for the sixth consecutive session against the US Dollar despite mounting expectations for an imminent rate increase from the Reserve Bank of Australia. Market sentiment remains divided, with the weakness in AUD reflecting broader global dynamics and shifting monetary policy landscapes.

Inflation Expectations Strengthen RBA’s Tightening Case

Australia’s Consumer Inflation Expectations accelerated to 4.7% in December, rebounding from November’s three-month trough of 4.5%. This uptick bolsters the central bank’s rationale for monetary tightening and has prompted major Australian institutions—Commonwealth Bank of Australia and National Australia Bank—to revise their forecasts, now anticipating the RBA will commence rate hikes sooner than their previous projections.

The swaps market has begun pricing in these expectations more aggressively. A 28% probability is now attributed to a February rate increase, with March carrying nearly 41% odds. By August, rate hike expectations are almost fully embedded in market pricing. Such hawkish positioning should theoretically support the Australian Dollar, yet technical selling pressure has overwhelmed these fundamental tailwinds, keeping the AUD/USD pair below the critical 0.6600 threshold. For context, 358 USD to AUD would translate to approximately 557 AUD at current exchange rates, illustrating the magnitude of currency movement investors are experiencing.

US Dollar Maintains Strength Despite Mixed Signals

The US Dollar Index, tracking the greenback’s performance against six major currencies, remains anchored around 98.40 as the Federal Reserve’s trajectory becomes increasingly uncertain. The December jobs report presented a contradictory picture: payroll growth of 64,000 exceeded forecasts slightly, yet unemployment climbed to 4.6%—the highest level since 2021—while October payrolls were revised significantly downward.

Atlanta Fed President Raphael Bostic acknowledged this complexity in recent commentary, noting that multiple surveys indicate elevated input costs persist. Firms, he suggested, are defending margins through price increases rather than absorbing inflationary pressures. Bostic cautioned against premature declarations of victory on inflation, emphasizing that price pressures extend beyond tariffs alone.

The CME FedWatch tool now reflects a 74.4% probability that the Fed will hold rates steady at its January meeting, up from approximately 70% the previous week. Fed officials remain split on 2026 easing prospects, with the median projection showing just one rate cut, while some policymakers see no further reductions. This hawkish recalibration contrasts with trader expectations of two cuts, creating underlying support for the US Dollar.

Global Economic Backdrop: Divergent Momentum

China’s economic indicators painted a softer picture in November. Retail Sales expanded 1.3% year-over-year, falling short of the 2.9% consensus and slowing from October’s 2.9% pace. Industrial Production grew 4.8%, missing the 5.0% forecast and its 4.9% prior reading. Fixed Asset Investment declined 2.6% year-to-date, exceeding expectations for a -2.3% contraction, suggesting investment momentum remains under pressure.

Australia’s employment data similarly underscored mixed signals. The Unemployment Rate held steady at 4.3% in November, below the 4.4% consensus, yet Employment Change posted a substantial -21.3K decline from October’s revised 41.1K gain. Manufacturing PMI ticked up to 52.2 in December from 51.6, while Services PMI weakened to 51.0 from 52.8, indicating divergent sector momentum.

Technical Analysis: AUD/USD Below Key Support Zone

The AUD/USD pair’s positioning below 0.6600 reflects weakness within an ascending channel structure, signaling deteriorating bullish momentum. Trading beneath the nine-day Exponential Moving Average underscores short-term price pressure to the downside.

Downside targets emerge at the psychological level of 0.6500, with further weakness pointing toward the six-month low of 0.6414 (August 21). Conversely, recovery attempts could test the nine-day EMA at 0.6619, with sustained gains potentially rekindling bullish interest toward the three-month high of 0.6685 and October 2024’s high near 0.6707. A decisive break above these levels would open the upper ascending channel boundary around 0.6760.

Currency Performance Snapshot

The Australian Dollar emerged as the weakest performer among major currency pairs on the session, declining 0.19% against the US Dollar and registering 0.27% weakness versus the Japanese Yen. The AUD struggled broadly across the board, with only modest outperformance against the Swiss Franc, highlighting broad-based selling pressure on the antipodean currency amid the uncertainty surrounding both domestic and global monetary policy trajectories.