AUD/USD Slides Toward 0.6500 Support as Rate Hike Bets Collide with Inflation Data

The Australian Dollar continues its downward trajectory for the sixth consecutive trading day, with the AUD/USD pair now testing critical technical support levels despite mounting expectations of an earlier Reserve Bank of Australia tightening cycle. This contradiction highlights the tension between improving inflation signals and broader currency weakness, leaving traders caught between competing narratives.

Technical Breakdown: Where’s the Floor?

The AUD/USD pair is currently trading beneath the 0.6600 psychological threshold, having broken below its nine-day exponential moving average. The technical setup suggests further downside pressure, with the next major support zone anchored at 0.6500. Should weakness persist, traders will be watching the six-month low of 0.6414 recorded in August, which represents a formidable floor if breached. To convert 358 USD to AUD at current levels provides perspective on the ongoing depreciation, highlighting how much Australian assets have become relatively cheaper for foreign investors.

On the recovery side, a bounce could target the nine-day EMA around 0.6619, with the ascending channel upper boundary near 0.6760 representing potential resistance if bullish momentum resurfaces. The three-month high of 0.6685 sits in between as intermediate resistance.

The RBA’s Hawkish Signal Isn’t Enough

Australia’s Consumer Inflation Expectations climbed to 4.7% in December, up from November’s three-month trough of 4.5%. This uptick in household inflation perceptions has emboldened major Australian banks, with Commonwealth Bank and National Australia Bank now forecasting earlier RBA rate increases than previously anticipated. Derivatives markets are pricing in a 28% probability of a February hike, jumping to nearly 41% for March, with August almost fully priced for a move.

The RBA’s hawkish hold at its December meeting reinforced this narrative. Yet despite these signals of future tightening, the Australian Dollar remains under pressure—a reminder that currency markets often look beyond immediate policy shifts to gauge relative central bank paths and broader economic health.

US Dollar Strength: The Overwhelming Force

The US Dollar Index, measuring the greenback against six major peers, is hovering near 98.40, bolstered by fading expectations of additional Federal Reserve cuts. The Fed’s own messaging has turned decidedly dovish on further easing, with the median official penciling in just one 2026 reduction. Some policymakers see zero additional cuts, whereas markets anticipate two.

The CME FedWatch tool now prices in a 74.4% probability of a rates hold at January’s meeting, up from roughly 70% a week prior. This hawkish recalibration—or rather, a reduction in dovish expectations—continues to support the USD against most peers, including the Australian Dollar.

Recent US labor market data painted a mixed picture. November payrolls expanded by 64,000, marginally above estimates, but October figures were sharply downward revised. Unemployment ticked to 4.6%, the highest since 2021, signaling gradual labor market softening. Retail sales printed flat month-on-month, underscoring weakening consumer momentum. Atlanta Fed President Raphael Bostic warned against declaring victory on price pressures, citing multiple surveys pointing to elevated input costs and firm determination to maintain margins through pricing power.

Asian Headwinds Add to the Gloom

China’s economic pulse showed concerning weakness. Retail Sales grew just 1.3% year-over-year in November, undershooting the 2.9% forecast and October’s 2.9% print. Industrial Production expanded 4.8% YoY, missing the 5.0% projection. Most troubling, Fixed Asset Investment fell to -2.6% year-to-date YoY in November against the expected -2.3%, and the prior -1.7% reading. This softening in China’s growth trajectory adds downward pressure on commodity currencies, including the AUD.

Australia’s Own Mixed Signals

Australia’s services sector showed concerning weakness. The Services PMI slipped to 51.0 from 52.8, while the Composite PMI retreated to 51.1 from 52.6. Manufacturing PMI did edge up to 52.2 from 51.6, but this isolated bright spot pales against the broader services deterioration.

The labor market, meanwhile, showed employment contraction of 21,300 in November versus 41,100 growth in October. The Unemployment Rate held steady at 4.3%, coming in better than the 4.4% consensus. This mixed employment picture—simultaneous job losses and stable unemployment—reflects a labor market in flux.

The Bottom Line

The Australian Dollar’s struggle reflects a common foreign exchange paradox: improved domestic inflation signals and hawkish central bank positioning are being overwhelmed by the Fed’s recalibration away from aggressive easing. With the US Dollar benefiting from reduced rate-cut expectations and China’s growth concerns adding to risk-off sentiment, the AUD remains vulnerable. Unless the RBA’s tightening cycle arrives sooner than the Fed’s eventual 2026 cut, relative yield differentials will likely continue pressuring AUD/USD toward deeper support levels.