AUD Faces Mounting Pressure Despite Inflation Signals—What's Driving the Selloff?

The Australian Dollar has surrendered ground for six consecutive trading sessions against the US Dollar on Thursday, signaling investor capitulation despite mounting evidence that the Reserve Bank of Australia (RBA) is preparing for policy tightening. The AUD/USD pair trades below the critical 0.6600 support zone, raising questions about where the next stabilization point may emerge.

Why Is the Aussie Weakening When Inflation Signals Point Higher?

At first glance, the data seems counterintuitive. Australia’s Consumer Inflation Expectations climbed to 4.7% in December, up from November’s three-month trough of 4.5%—a move that traditionally would offer the Australian Dollar a lift. This reading bolsters the RBA’s hawkish narrative, with major Australian lenders Commonwealth Bank and National Australia Bank now penciling in rate increases as soon as February 2025.

Market pricing reflects this shift: swaps data now assigns a 28% probability to a February hike, nearly 41% for March, with August almost fully priced in for tightening. Yet rather than rallying on this prospect, the Aussie has retreated. The paradox reveals a deeper truth about currency markets—relative interest rate differentials matter more than domestic data in isolation.

The US Dollar’s Surprising Resilience Amid Cooling Growth Signals

The real culprit behind AUD weakness is not deteriorating fundamentals at home but rather the US Dollar’s unexpected resilience. The US Dollar Index (DXY), which tracks the greenback against six major currencies, holds ground near 98.40, buoyed by shifting expectations around Federal Reserve policy.

Initial market readings of the latest US jobs report suggested dovish tailwinds—payroll growth of 64K missed forecasts, October figures saw sharp downward revisions, and the unemployment rate ticked up to 4.6%, the highest since 2021. Retail sales remained flat month-on-month, hinting that consumer demand is losing momentum.

However, Atlanta Federal Reserve President Raphael Bostic struck a more cautious tone in a Tuesday blog post. While acknowledging the employment picture as mixed, he warned against premature policy easing. Bostic highlighted that multiple surveys point to elevated input costs and pricing pressures across firms determined to defend margins. His quote—“Price pressures are not just coming from tariffs; the Fed should not be hasty to declare victory”—captured the dilemma facing policymakers.

The upshot? The Federal Reserve appears reluctant to accelerate rate cuts despite softer labor data. The CME FedWatch tool now prices an implied 74.4% probability of the Fed holding rates steady at January’s meeting, up from roughly 70% a week prior. Fed officials remain split on 2026 easing, with the median projection penciling just one cut next year, while some policymakers see no further reductions at all. Traders, by contrast, anticipate two cuts—a meaningful gap suggesting potential disappointment ahead.

China’s Economic Stumble Adds to Risk Sentiment

Weakness is not confined to labor markets. China’s National Bureau of Statistics released November data showing retail sales growing just 1.3% year-over-year, well below the 2.9% forecast and prior month’s 2.9% reading. Industrial Production climbed 4.8% versus the 5.0% forecast. Fixed Asset Investment declined 2.6% year-to-date, missing the -2.3% expectation.

These disappointments in the world’s second-largest economy feed into risk-off sentiment, pressuring commodity-linked currencies like the Australian Dollar.

Australia’s Own Labor Market Shows Cracks

Closer to home, Australia’s employment picture weakened in November. The Unemployment Rate held at 4.3%, undercutting the 4.4% consensus, but Employment Change swung to -21.3K from October’s revised +41.1K—a swing of over 60K that caught many observers off guard. This divergence between the unemployment level and the change in jobs created suggests a period of labor market adjustment ahead.

Manufacturing momentum also cooled. Australia’s preliminary S&P Global Manufacturing PMI edged up to 52.2 in December from 51.6 previously, but Services PMI slipped to 51.0 from 52.8, and the Composite fell to 51.1 from 52.6—signals that economic activity is plateauing.

Technical Breakdown: AUD/USD Retreats Below Key Support

From a technical standpoint, the AUD/USD pair has surrendered the 0.6600 confluence support zone and now trades below the nine-day Exponential Moving Average, signaling weakening short-term momentum. The pair has also fallen below its ascending channel trendline, suggesting bullish structure is eroding.

The next downside target is the psychological 0.6500 level, followed by the six-month low of 0.6414 set on August 21. A sustained break below 0.6414 would open the door toward fresh lows.

On the rebound, the AUD/USD pair would need to reclaim the nine-day EMA at 0.6619 to revive near-term bullish interest. A push back toward the ascending channel would clear the way for tests of the three-month high at 0.6685 and resistance at 0.6707 (the highest level since October 2024). Further strength would target the upper channel boundary around 0.6760.

Relative Currency Performance and the Broader Trend

Today’s session highlights the Australian Dollar as the weakest performer among major currencies—particularly against the Japanese Yen. When measuring currency pairs, the Aussie’s underperformance stands in sharp relief. For context, those monitoring cross-rate conversions (such as 380 USD to NZD equivalents) should note that the Australian Dollar’s weakness creates favorable entry conditions for those long the US Dollar, while NZD strength is partly driven by AUD weakness in regional FX dynamics.

The Outlook: Rate Expectations Meet Risk Sentiment

The paradox facing the Australian Dollar is this: the RBA’s hawkish lean should theoretically buttress the currency, yet global risk sentiment and the Federal Reserve’s higher-for-longer stance are overwhelming this benefit. Until either the Fed signals material easing or global growth stabilizes, the Aussie faces headwinds.

The February RBA decision will be pivotal. If the central bank delivers its first hike as markets increasingly expect, the Australian Dollar could find a floor—provided the Fed doesn’t simultaneously tighten its own stance further. For now, traders should monitor the technical support zones closely while watching for any shifts in Fed communication that could shift the relative interest rate equation in the Aussie’s favor.