AUD/USD Technical Breakdown Signals Further Downside Amid Fed Rate Cut Uncertainty

The Australian Dollar continues its downward trajectory for a sixth consecutive trading session, with the AUD/USD pair slipping below the critical 0.6600 support level on Thursday. Technical analysis reveals a weakening bullish structure, as price action has dipped beneath the nine-day Exponential Moving Average (EMA), signaling deteriorating short-term momentum. Investors now watch for potential moves toward the psychological 0.6500 barrier, with the six-month low of 0.6414 from August 21 representing a deeper downside target.

Market Sentiment Shifts as Inflation Data Complicates RBA Rate Outlook

Recent developments in Australia’s inflation expectations suggest a more complex picture for monetary policy decisions. Consumer Inflation Expectations rebounded to 4.7% in December after easing to a three-month low of 4.5% in November. This uptick has reinforced the Reserve Bank of Australia’s more aggressive policy stance, with major financial institutions including Commonwealth Bank of Australia and National Australia Bank recalibrating their forecasts to anticipate tightening measures beginning as early as February.

Swaps markets currently reflect a 28% probability of rate action in February, climbing to nearly 41% for March, with pricing suggesting the tightening cycle will be largely complete by August. However, despite these hawkish signals from the inflation data and market pricing, the Australian Dollar has failed to capitalize on rate hike expectations—a divergence that underscores broader weakness in antipodean currency dynamics.

US Dollar Remains Supported by Fed Easing Pause

The US Dollar Index (DXY), which tracks the greenback against six major currencies, continues trading around 98.40, buoyed by expectations that the Federal Reserve will maintain its current course of policy restraint. The latest jobs report painted an ambiguous portrait: payroll growth of 64K came in marginally ahead of forecasts, yet October’s figures were revised significantly lower, while the unemployment rate rose to 4.6%—the highest reading since 2021. Retail sales growth stalled month-over-month, indicating weakening consumer demand.

Federal Reserve officials remain divided on the necessity of additional monetary easing in 2026. The policy committee’s median projection incorporates just a single rate reduction next year, with several policymakers favoring no cuts whatsoever. Market participants, by contrast, are pricing in two reductions. This divergence has bolstered the USD, with CME FedWatch data showing implied odds of unchanged rates at January’s meeting rising to 74.4%, up from approximately 70% one week prior.

Atlanta Federal Reserve President Raphael Bostic highlighted the employment report’s mixed character in recent commentary, noting that his preference remains unchanged policy rates. Importantly, Bostic emphasized that multiple surveys indicate rising input costs, with firms protecting profitability through price increases. He cautioned against premature declarations of victory on inflation, citing tariff-related pressures and broader price momentum, while projecting 2026 GDP growth near 2.5%.

Global Economic Signals Add Complexity to Currency Dynamics

China’s economic performance released this week presented a softer growth trajectory. Retail Sales climbed just 1.3% year-over-year in November, disappointing expectations of 2.9% and marking a deceleration from October’s 2.9%. Industrial Production increased 4.8% year-over-year, falling short of the 5.0% forecast and October’s 4.9%. Fixed Asset Investment showed further deterioration at -2.6% year-to-date year-over-year for November, missing the anticipated -2.3% figure and worsening from October’s -1.7%.

On the Australian domestic front, manufacturing activity edged higher with the S&P Global Manufacturing PMI reaching 52.2 in December from 51.6, signaling tentative expansion. However, Services PMI retreated to 51.0 from 52.8, while the Composite PMI slid to 51.1 from 52.6, suggesting a mixed economic backdrop. The unemployment rate held steady at 4.3% in November, beating expectations of 4.4%, though employment additions disappointed with a decline of 21.3K compared to October’s revised 41.1K gain and consensus forecasts of 20K growth.

Technical Levels and Currency Pair Performance

Should the AUD/USD pair rebound, initial resistance arrives at the nine-day EMA positioned near 0.6619. A sustained recovery would challenge the ascending channel trend, potentially opening the path toward the three-month high of 0.6685, followed by 0.6707 (the highest level since October 2024). Breaking above the upper ascending channel boundary around 0.6760 would represent a more substantial reversal.

Currency strength analysis reveals the Australian Dollar ranked as the weakest performer against the Japanese Yen among major pairs today, reflecting broad-based headwinds affecting the antipodean unit across the forex landscape.