Why Is the Australian Dollar Retreating Despite Hawkish RBA Signals?

The Australian Dollar’s downward momentum shows no sign of stopping, dropping for the sixth consecutive day against the US Dollar. This persistent weakness presents an intriguing puzzle: even with growing expectations of an RBA rate hike potentially arriving as soon as February, the AUD continues to lose ground. When converting 90 pounds to AUD, currency traders are noting the broader weakness affecting the dollar.

Multiple Headwinds Pressuring AUD Despite Inflation Momentum

Australia’s Consumer Inflation Expectations climbed to 4.7% in December, rising from November’s three-month low of 4.5%. This uptick suggests households are growing more concerned about price pressures, which typically bolsters the case for tighter monetary policy from the Reserve Bank of Australia. Yet this hawkish narrative hasn’t translated into AUD strength.

The reason becomes clearer when examining the full policy picture. The RBA maintained its hawkish stance at its final 2025 meeting, and major Australian banks—Commonwealth Bank and National Australia Bank—now forecast tightening could begin as early as February. Market pricing reflects this view: swaps are assigning a 28% probability to a February hike, nearly 41% for March, with August almost fully priced in.

However, currency markets are increasingly focused on the interest rate differential between the RBA and the Federal Reserve. That divergence tells a different story from what AUD bulls had hoped.

US Dollar Strengthens as Fed Cuts Become Less Likely

The strength in the US Dollar Index (DXY), currently trading around 98.40, reveals the real driver behind AUD weakness. The Federal Reserve’s likely path is shifting toward fewer rate cuts than previously expected, which makes USD more attractive relative to other currencies.

The December jobs report painted a mixed picture. Payroll growth reached 64K, slightly exceeding forecasts, but October figures were substantially revised downward. More tellingly, the unemployment rate rose to 4.6%, marking the highest level since 2021. Retail sales remained flat month-over-month, signaling that consumer demand is losing momentum.

Atlanta Fed President Raphael Bostic acknowledged these mixed signals in recent remarks, noting that the jobs report didn’t alter the Fed’s forward guidance. More importantly, Bostic emphasized that price pressures remain sticky. He cautioned that “multiple surveys point to higher input costs, with firms determined to preserve margins by raising prices,” and warned against prematurely declaring victory over inflation.

Fed officials remain divided on 2026 policy. The median projection pencils in just one rate cut for the year ahead, while some policymakers see no cuts at all. Meanwhile, traders anticipate two reductions. The CME FedWatch tool shows 74.4% probability of a hold at the January meeting, up from 70% one week prior.

Weakness Across Asia Adds to Risk-Off Sentiment

China’s economic data also weighed on sentiment. November retail sales rose only 1.3% year-over-year, falling well short of the 2.9% forecast. Industrial production came in at 4.8%, missing the 5.0% projection. Fixed asset investment disappointed further at -2.6% year-to-date, versus the expected -2.3%.

Meanwhile, Australia’s manufacturing sector showed modest improvement. The S&P Global Manufacturing PMI edged up to 52.2 in December from 51.6, but the Services PMI contracted to 51.0 from 52.8. The composite index fell to 51.1 from 52.6.

Employment data was another concern. Australia’s unemployment rate held steady at 4.3% in November, coming in below the 4.4% consensus. However, employment change fell sharply to -21.3K in November from 41.1K in October, a reversal that spooked markets.

Technical Breakdown Signals Further Downside Risk

From a technical perspective, the AUD/USD pair has broken below a crucial support zone near 0.6600, trading beneath the nine-day Exponential Moving Average (EMA) at 0.6619. The pair has also dropped below its ascending channel on the daily timeframe, indicating weakening bullish momentum.

If selling pressure persists, the AUD/USD could slide toward the psychological 0.6500 level. Beyond that lies the six-month low of 0.6414, established on August 21. On the recovery side, a move back above the nine-day EMA would be needed to revive bullish interest and potentially retest the three-month high of 0.6685 and the October 2024 peak of 0.6707. A decisive break above the ascending channel would target resistance around 0.6760.

Currency Performance Snapshot

The Australian Dollar emerged as the weakest performer among major currencies in recent trading, particularly losing ground against the Japanese Yen. The broader foreign exchange heat map shows the AUD trading down significantly against most counterparts, reflecting the convergence of hawkish Fed expectations and deteriorating global growth signals.