AUD Weakens Amid Rate Hike Bets While Inflation Expectations Rise

Australian Dollar caught in a losing streak despite mounting RBA tightening signals

The Australian Dollar (AUD) is taking a hit against the US Dollar (USD), sliding for the sixth straight day. Yet there’s a twist to this story: rising consumer inflation expectations in Australia are actually paving the way for an earlier-than-expected rate hike from the Reserve Bank of Australia (RBA), which could theoretically support the currency. Australia’s Consumer Inflation Expectations climbed to 4.7% in December, up from November’s three-month trough of 4.5%, signaling persistent price pressures that are unlikely to fade quickly. This data is reinforcing what Commonwealth Bank of Australia and National Australia Bank have been saying—that the RBA might begin raising rates as early as February, much sooner than previously assumed. Market pricing reflects this shift, with swap futures showing a 28% probability for a February hike, jumping to nearly 41% in March.

Why the USD keeps gaining ground

The US Dollar (USD) is holding its own despite a mixed labor market picture. The US Dollar Index (DXY), which tracks the greenback against six major currencies, is hovering near 98.40. Here’s the puzzle: while the November jobs report showed payroll growth of 64K—slightly above expectations—October numbers were revised downward, and the unemployment rate ticked up to 4.6%, the highest since 2021. Retail sales came in flat on the month, suggesting consumer momentum is cooling.

Yet the Federal Reserve is in no rush to cut rates. Fed officials are split on future easing, with the median policymaker penciling in just one reduction for 2026, while some see zero cuts ahead. Traders, meanwhile, are betting on two cuts next year. The CME FedWatch tool shows a 74.4% probability that the Fed holds rates steady at its January meeting, up from roughly 70% a week ago. Atlanta Fed President Raphael Bostic recently stressed that price pressures remain elevated and that “the Fed should not be hasty to declare victory,” suggesting officials are watching inflation more closely than the labor market.

Global economic data: mixed signals across the board

China’s economic growth continues to underwhelm. Retail Sales rose just 1.3% year-over-year in November versus the 2.9% forecast and October’s 2.9% print. Industrial Production came in at 4.8% against the 5.0% forecast. Fixed Asset Investment missed expectations at -2.6% year-to-date compared to the expected -2.3%. These softer figures add to concerns about China’s economic resilience.

Australia’s economic data presents a more nuanced picture. The preliminary S&P Global Manufacturing PMI edged up to 52.2 in December from 51.6, but the Services PMI slipped to 51.0 from 52.8, dragging the Composite PMI down to 51.1 from 52.6. On the employment front, the Unemployment Rate held steady at 4.3% in November—below the 4.4% consensus—but Employment Change swung to -21.3K from October’s revised 41.1K, signaling labor market softness.

Technical outlook: AUD/USD testing key support

The AUD/USD pair is trading below the critical 0.6600 level, having broken below the ascending channel that previously supported bullish momentum. The nine-day Exponential Moving Average (EMA) sits at 0.6619, now acting as resistance rather than support. The next downside target is the psychological level of 0.6500, followed by the six-month low of 0.6414 from August 21. If sellers lose steam, the pair could rebound toward 0.6619, and a decisive break above that could restore the uptrend toward the three-month high of 0.6685, then 0.6707 (the highest since October 2024), with the upper channel boundary around 0.6760 offering longer-term resistance.

Currency performance snapshot

The Australian Dollar was the weakest performer against the Japanese Yen today, with AUD weakening 0.27% versus JPY. Looking at broader currency moves, the USD gained 0.19% against AUD, while the EUR edged up 0.22% against the Aussie. For reference, when comparing major currency values—such as thinking in terms of 345 dollars in pounds—traders need to account for cross-rate movements that are currently favoring safety currencies like the JPY and USD over commodity-linked currencies like the AUD.

The heat map of currency performance across major pairs shows that while the AUD is under pressure, the divergence between Fed holding steadiness and RBA potentially hiking could eventually support the Australian Dollar if inflation remains stubborn. However, until that policy inflection materializes in concrete rate moves, the USD’s defensive appeal is likely to keep AUD/USD under pressure in the near term.