Will RBA's Hawkish Tilt Push AUD/USD Higher? Australian Dollar Struggles Despite Inflation Momentum

Australian Dollar under pressure for six straight days, but RBA rate hike odds climbing

The Australian Dollar has been on the back foot against its US counterpart throughout the week, with AUD/USD sliding for the sixth consecutive session. However, beneath the surface, market expectations are shifting notably. Australia’s Consumer Inflation Expectations climbed to 4.7% in December, ticking up from November’s 4.5% low—a development that’s tightening the case for earlier Reserve Bank of Australia action.

The irony isn’t lost: even as inflation expectations strengthen and RBA officials signal hawkish resolve, the Aussie Dollar remains under selling pressure. This disconnect hints at a broader theme dominating currency markets—the divergence between monetary policy signals and actual price action.

RBA versus Fed: Whose tightening narrative wins?

Commonwealth Bank and National Australia Bank have both revised their forecasts, now expecting the Reserve Bank of Australia to lift rates sooner than their previous projections. The shift comes on the heels of the RBA’s firm hold on policy at its December meeting, signaling little tolerance for persistent inflation in a capacity-constrained economy.

Swaps markets are pricing in roughly a 28% probability of a February rate increase, climbing to 41% for March, with nearly full pricing for an August move. This chain of rate hike expectations should theoretically support the Australian Dollar. Yet the currency continues to weaken, suggesting investors are more concerned about what the Federal Reserve might do—or more precisely, what it won’t do.

US Dollar buoyed by fading Fed easing bets

The US Dollar Index, tracking the greenback against six major currencies, sits near 98.40 and has held its ground despite mixed economic signals. The key driver: shrinking expectations for additional Federal Reserve rate cuts.

Recent US jobs data told a nuanced story. November payroll growth came in at 64,000, marginally above forecasts, yet October’s figures were revised sharply downward. The unemployment rate ticked up to 4.6%, marking its highest level since 2021. Retail sales growth flat-lined month-on-month, pointing to eroding consumer momentum. On the surface, this should support the case for Fed rate cuts. Instead, Fed officials remain divided, and market pricing has shifted dramatically.

Atlanta Fed President Raphael Bostic noted in recent commentary that input cost pressures remain stubborn and that firms are determined to protect margins through price increases. “Price pressures are not just coming from tariffs,” Bostic warned, signaling the Fed shouldn’t rush to declare victory on inflation. His own GDP forecast for 2026 sits around 2.5%—hardly a recessionary call.

The median Fed official now projects just a single rate cut for 2026, with some policymakers seeing no further reductions at all. Market traders, meanwhile, are bracing for two cuts. The CME FedWatch tool shows fed funds futures pricing a 74.4% probability of unchanged rates at January’s meeting, up from 70% the previous week.

China’s soft patches add to global growth concerns

Across the Pacific, China’s economic data painted an uneven picture in November. Retail Sales growth slowed to 1.3% year-over-year, missing the 2.9% forecast. Industrial Production expanded 4.8%, below the 5.0% expectation. Fixed Asset Investment contracted 2.6% year-to-date, overshooting the expected -2.3% miss.

For the Australian Dollar, China’s softer economic footprint raises questions about global commodity demand and growth prospects—an indirect headwind for a currency often viewed as a risk proxy.

Australia’s labor market cools, manufacturing PMI ticks up

On the domestic front, Australia’s Manufacturing PMI edged higher to 52.2 in December from 51.6 previously, suggesting modest manufacturing resilience. The Services PMI, however, slipped to 51.0 from 52.8, while the Composite PMI fell to 51.1 from 52.6. Mixed signals from the real economy.

The unemployment rate held steady at 4.3% in November, below the 4.4% consensus. Yet employment change disappointed, with a loss of 21,300 positions in November following an October gain of 41,100 (revised). This volatility in labor data may complicate the RBA’s narrative about a capacity-constrained economy justifying tighter policy.

AUD/USD technical breakdown: Support zones in focus

On the daily chart, AUD/USD has broken below the 0.6600 level and is trading beneath its nine-day Exponential Moving Average. The pair has slipped below its ascending channel, signaling weakening bullish momentum.

To put this in perspective: at current levels near 0.6600, converting $2,000 USD to AUD yields approximately $3,280-$3,300 AUD, depending on exact execution price. Traders eyeing support look toward the 0.6500 psychological level, with the six-month low of 0.6414 (August 21) as the next downside target.

On rebounds, resistance emerges at the nine-day EMA around 0.6619. Pushing higher, the three-month high of 0.6685 comes into view, followed by 0.6707 (the highest level since October 2024). A sustained move above this zone could challenge the upper ascending channel boundary near 0.6760.

The verdict: Policy divergence tilts USD higher, for now

While the RBA’s hawkish tilt supports the case for Australian Dollar strength, the Fed’s dovish pivot has stalled. Until market expectations fully reconcile the divergence between RBA rate hikes and Fed pause scenarios, the US Dollar remains the favored side of this pair. Watch the February RBA decision for the next inflection point.