Australian Dollar Faces Persistent Weakness Amid Mixed RBA Outlook and Fed Pause Signals

Rate Hike Expectations Prop Up the Aussie, Yet Losses Continue

Despite strengthening signals that the Reserve Bank of Australia could begin hiking rates as soon as February, the Australian Dollar continues to retreat against its US counterpart for the sixth consecutive trading day. This apparent contradiction stems from a broader market sentiment shift, where rising inflation expectations alone are insufficient to reverse currency weakness driven by shifting global monetary dynamics.

Australia’s Consumer Inflation Expectations climbed to 4.7% in December, up from November’s three-month trough of 4.5%. This uptick aligns with the RBA’s hawkish positioning following its final 2024 meeting, where policymakers maintained an elevated stance on future tightening. The odds markets are assigning to a February rate increase have reached 28%, with March expectations at nearly 41%, and August almost fully priced in for a move.

Commonwealth Bank of Australia and National Australia Bank have both revised their tightening timelines forward, citing stubborn inflation pressures within a capacity-constrained economy. Yet the currency market’s reaction suggests that regional interest rate expectations alone cannot compete with the gravitational pull of US Dollar strength.

US Dollar Capitalizes on Fading Fed Cut Expectations

The US Dollar Index, tracking the greenback’s performance against six major counterparts, hovers around 98.40, buoyed by diminishing speculation about additional Federal Reserve rate reductions. The momentum stems from a reassessment of the economic backdrop and Fed communication.

November’s US employment report delivered mixed signals. Payroll additions came in at 64,000, marginally above forecasts, though October readings were revised sharply lower. The unemployment rate ticked up to 4.6%, marking the highest level since 2021, signaling gradual labor market cooling. Retail sales printed flat month-over-month, reinforcing emerging weakness in consumer activity.

Federal Reserve officials remain divided on easing. The median projection penciled in just one rate cut for 2026, while some officials see zero additional moves. Futures markets, meanwhile, expect two cuts over the same period. Atlanta Federal Reserve President Raphael Bostic noted that the jobs report presented a “mixed picture” and would not materially shift the Fed’s near-term stance. Bostic emphasized that “price pressures extend beyond tariff effects,” warning against premature declarations of victory on inflation.

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% a week prior.

Global Data Underscores Divergent Economic Trajectories

Chinese economic readings revealed softer momentum heading into year-end. Retail Sales expanded just 1.3% year-over-year in November, missing the 2.9% consensus and marking a deceleration from October’s 2.9% pace. Industrial Production grew 4.8% year-over-year, shy of the 5.0% forecast and October’s 4.9% print. Fixed Asset Investment deteriorated to -2.6% year-to-date, undershooting the -2.3% expectation.

Australia’s manufacturing sector showed fractional resilience. The S&P Global Manufacturing PMI edged to 52.2 in December from 51.6, remaining above the 50 expansion threshold. However, the Services PMI contracted to 51.0 from 52.8, while the Composite PMI fell to 51.1 from 52.6, suggesting broadening weakness across the economy.

Employment conditions tightened further. The Unemployment Rate held at 4.3% in November, beating the 4.4% forecast. Employment Change, however, swung to -21,300 from October’s revised 41,100, well below the expected 20,000 gain and signaling labor market deterioration.

Technical Setup: Support Breached, Downside Targets Emerge

The AUD/USD pair has cracked below the critical 0.6600 confluence zone on Thursday’s session. Daily chart analysis reveals the pair trading beneath the ascending channel trend, indicating erosion of bullish momentum. The nine-day Exponential Moving Average sits at 0.6619, with price action currently beneath this level, confirming weakened short-term technicals.

Should selling pressure intensify, the pair may descend toward the psychological 0.6500 level, followed by the six-month low of 0.6414 established on August 21. A stabilization bounce could test the nine-day EMA resistance, with reclamation of the ascending channel opening a path to the three-month high of 0.6685. Extended gains would target 0.6707, the peak since October 2024, with the upper channel boundary near 0.6760 offering the ultimate resistance threshold.

Currency Performance Snapshot

The Australian Dollar registered the weakest relative performance against the Japanese Yen among major currency pairs today. Across the broader foreign exchange complex, the Aussie depreciated by approximately 0.19% against the US Dollar, while strengthening marginally by 0.12% against the New Zealand Dollar. This two-directional movement reflects the pair-specific dynamics driving AUD weakness, rather than a uniform currency collapse.