Why Isn't the Australian Dollar Rallying? RBA Hawkish Signals Clash with USD Strength and Weak Labor Data

The Australian Dollar faces persistent selling pressure despite growing market expectations of an RBA rate hike as early as February. Inflation expectations in Australia surged to 4.7% in December, up from November’s 4.5%, reinforcing the central bank’s hawkish narrative. However, a strong US Dollar and fading Federal Reserve rate-cut bets are proving more compelling for currency traders right now.

The AUD/USD pair has surrendered ground for six consecutive trading sessions on Thursday, trading below the critical 0.6600 level. At first glance, this seems counterintuitive—rising inflation expectations and growing odds of an RBA tightening cycle should support the Aussie. Yet the currency remains under pressure, revealing the complex interplay between domestic rate-hike bets and broader dollar strength.

The RBA’s Hawkish Tilt Isn’t Enough to Lift the Aussie

Australia’s Consumer Inflation Expectations jumping to 4.7% from 4.5% has intensified speculation around early RBA action. Major Australian banks, including Commonwealth Bank and National Australia Bank, have adjusted their forecasts to reflect sooner-than-expected rate hikes. Market pricing now reflects a 28% probability of a February hike, nearly 41% in March, with full pricing expected by August.

The RBA’s recent hawkish hold at its final 2025 meeting added fuel to this narrative. Officials highlighted the persistence of inflation in a capacity-constrained economy, signaling that rate hikes may arrive sooner rather than later. On paper, this should boost the Australian Dollar—higher yields typically attract foreign capital seeking better returns.

Yet the market is telling a different story. The Aussie remains under selling pressure, suggesting that rate-hike expectations alone aren’t moving the needle in the currency’s favor.

The US Dollar’s Strength is Dominating the Narrative

The real driver of AUD/USD weakness appears to be US Dollar strength, not Australian Dollar weakness. The US Dollar Index, which measures the greenback against six major peers, continues to hold firm near 98.40, supported by diminishing expectations of additional Federal Reserve rate cuts.

Fed officials are clearly divided on 2026 monetary policy. The median Fed projection pencils in just one rate reduction next year, but some policymakers see no further cuts whatsoever. Meanwhile, traders are anticipating two cuts—a notable disconnect that’s keeping the Fed funds futures pricing in a 74.4% probability of rates staying unchanged at the central bank’s January meeting, up from 70% a week ago.

The recent US November jobs report painted a mixed picture. Payroll growth came in at 64K—slightly above expectations but revised sharply lower for October. The unemployment rate ticked up to 4.6%, the highest level since 2021, and retail sales stalled on a monthly basis. Despite these soft labor indicators, Fed officials like Atlanta Federal Reserve President Raphael Bostic have pushed back against aggressive easing expectations, citing sticky inflation and pricing pressure across the economy.

Bostic emphasized that “Price pressures are not just coming from tariffs” and warned that “the Fed should not be hasty to declare victory.” This hawkish tone—even as labor markets cool—is keeping the dollar elevated and limiting upside for risk-sensitive currencies like the Australian Dollar.

China’s Weakness Adds Another Layer of Headwind

China’s economic data released this week has weighed on broader risk sentiment. Retail Sales rose just 1.3% year-over-year in November, missing the 2.9% forecast. Industrial Production grew 4.8% YoY, matching expectations but down from the prior 4.9% reading. Fixed Asset Investment came in at -2.6% year-to-date, undershooting the -2.3% consensus and deteriorating from October’s -1.7%.

Weaker Chinese growth typically pressures the Australian Dollar, given Australia’s heavy reliance on Chinese demand for commodities. This headwind is working against the Aussie despite rising rate-hike expectations at home.

Australia’s Labor Market Remains a Soft Spot

Domestically, Australia’s employment picture has cooled. The Unemployment Rate held steady at 4.3% in November, beating the 4.4% consensus, but Employment Change printed at -21.3K compared to October’s revised 41.1K. This unexpected decline raised questions about labor market momentum, potentially tempering some of the hawkishness from rising inflation expectations.

Manufacturing PMI edged up to 52.2 in December, but Services PMI retreated to 51.0 from 52.8, and the Composite PMI fell to 51.1 from 52.6—signs of uneven economic activity that complicate the RBA’s rate-hike narrative.

The Technical Picture: Where Does AUD/USD Go From Here?

The AUD/USD pair’s position below 0.6600 reflects a break of a key confluence support zone. The pair is now trading below the nine-day Exponential Moving Average at 0.6619, indicating deteriorating short-term momentum. The pair has slipped below an ascending channel that had supported bullish sentiment, suggesting a shift toward weakness.

On the downside, the psychological level of 0.6500 looms as the next target, followed by the six-month low of 0.6414 set on August 21. A decisive break below 0.6500 could open the door to further losses.

To the upside, the pair would need to recapture the nine-day EMA at 0.6619 and breach back into the ascending channel. A successful retest could then target the three-month high of 0.6685, followed by 0.6707 (the highest since October 2024). A push above these levels would test the upper channel boundary near 0.6760, reviving bullish positioning.

What’s Next for Traders?

The Australian Dollar’s struggle highlights a critical market dynamic: local rate-hike expectations don’t automatically translate to currency strength when global forces—particularly US Dollar strength—are working in the opposite direction. The 276 USD to CAD conversion rates show how broad-based US Dollar strength is affecting multiple currency pairs, not just the Aussie.

Traders should watch for RBA communications in the coming weeks, alongside Federal Reserve meetings and US economic data. A surprise acceleration in Australian inflation or a reversal in Fed rate-cut expectations could quickly shift the currency dynamics in favor of the Aussie. For now, the US Dollar’s grip remains firm, keeping the AUD/USD pair pinned near technical support.