Why Is the Australian Dollar Failing to Rally Despite Hawkish RBA Signals?

The Australian Dollar continues to slide against the US Dollar on its sixth consecutive day of weakness, painting a puzzling picture for traders who expected the currency to benefit from rising inflation expectations. Despite mounting evidence that the Reserve Bank of Australia may accelerate rate hikes as early as February, the AUD/USD pair remains trapped below the 0.6600 mark, suggesting that RBA tightening alone may not be enough to support the currency in the near term.

Inflation Expectations Rise, But AUD Still Struggles

Australia’s Consumer Inflation Expectations climbed to 4.7% in December, up from November’s low of 4.5%, fueling speculation about accelerated monetary tightening. Major Australian banks—Commonwealth Bank and National Australia Bank—have already shifted their forecasts, now projecting that the RBA will begin rate increases sooner than previously anticipated. Market pricing reflects this shift, with swaps showing a 28% probability of a February hike and 41% odds for March, with August nearly fully priced in for tightening.

Yet this hawkish repricing has failed to provide meaningful support to the currency. The disconnect suggests that while local rate expectations have tightened, global factors—particularly US Dollar strength—are overwhelming the positive signals from Australia’s inflation trajectory.

US Dollar Dominance Overshadows Regional Strength

The real culprit behind the Australian Dollar’s underperformance is the surprising resilience of the US Dollar. The US Dollar Index (DXY) remains well-bid around 98.40, as investors reassess expectations for Federal Reserve monetary policy. Recent economic data painted a mixed picture: November payroll growth came in at 64K (slightly above forecasts), but the unemployment rate rose to 4.6%—the highest level since 2021—while October’s job figures were revised substantially lower.

Atlanta Federal Reserve President Raphael Bostic signaled caution on further easing, emphasizing that price pressures persist beyond just tariff effects and that he favors holding rates steady. This hawkish messaging has dampened bets on additional Fed cuts, with traders now pricing in just two rate reductions for 2026—below the median Fed official projection of one cut. The CME FedWatch tool indicates a 74.4% probability of unchanged rates at the next Fed meeting in January, up from 70% a week prior.

This divergence—where the RBA is tightening while the Fed holds or cuts minimally—would normally favor the Australian Dollar. Instead, the broader market preference for US assets and the dollar’s safe-haven appeal continue to pressure AUD/USD lower.

Mixed Economic Signals From the Asia-Pacific Region

Australia’s manufacturing sector showed modest improvement, with the S&P Global Manufacturing PMI edging up to 52.2 in December from 51.6. However, the Services PMI retreated to 51.0 from 52.8, while the Composite PMI slipped to 51.1 from 52.6, indicating that momentum is fading across multiple sectors. The Australian unemployment rate held steady at 4.3% in November, beating expectations of 4.4%, but employment declined by 21.3K during the month—a sharp reversal from October’s 41.1K gain.

Across the Tasman, China’s economic performance remains soft. November Retail Sales rose just 1.3% year-over-year, significantly below the 2.9% forecast, while Industrial Production expanded 4.8% (versus the 5.0% consensus). Fixed Asset Investment deteriorated further to -2.6% year-to-date, missing the -2.3% forecast. This regional slowdown adds downward pressure on commodity-linked currencies like the Australian Dollar and further undermines AUD/USD support.

Technical Breakdown Signals Further Downside Risk

From a technical perspective, the AUD/USD pair has broken below key support at 0.6600 and is now trading beneath its nine-day Exponential Moving Average (EMA), signaling weakening short-term momentum. The pair is also positioned below its ascending channel trend line, suggesting the prior bullish bias has reversed.

The immediate downside target sits at the psychological 0.6500 level, followed by the six-month low of 0.6414 (set on August 21). On the recovery side, resistance appears at the nine-day EMA (0.6619), with a successful retest potentially reviving bullish momentum back toward the three-month high of 0.6685 and eventually the October 2024 peak at 0.6707. Further strength would need to clear the upper ascending channel boundary near 0.6760 to reignite a sustained rally.

Currency Weakness Across the Board

The Australian Dollar recorded the sharpest losses within the major currency complex today, falling 0.19% against the US Dollar and showing particular weakness against the Japanese Yen (down 0.27%). This broad-based weakness underscores the currency’s struggle despite domestic tightening expectations. When compared to the Canadian Dollar context (where 103 CAD to USD conversions illustrate the current USD strength in cross-rate dynamics), the Australian Dollar’s underperformance becomes even more apparent, as commodity-linked currencies globally are surrendering ground to the US Dollar’s structural advantage.

The Bottom Line: Rate Hikes Alone Won’t Save AUD

The Australian Dollar faces a classic dilemma: while the RBA’s hawkish tilt should theoretically support the currency, the gravitational pull of US Dollar strength and broader geopolitical capital flows are proving too powerful to overcome. Until the Fed signals concrete rate hikes or global risk appetite deteriorates sharply, the Australian Dollar is likely to remain range-bound to lower, with the 0.6500 level representing the next significant test for bulls.