Australian Dollar Faces Fresh Headwinds as Fed Rate Cut Bets Fade and RBA Hawkish Signals Mount

The AUD extends its sixth consecutive day of weakness against the USD as market participants reassess monetary policy divergence between the two central banks. Growing market conviction that the Reserve Bank of Australia could raise rates as early as February is failing to stabilize the currency. Meanwhile, the US Dollar benefits from diminishing expectations of further Federal Reserve easing into 2026.

The Australian Dollar continues its downward trajectory against the US Dollar on Thursday, struggling to find traction despite inflation data that should theoretically support the RBA’s tightening bias. Markets are increasingly pricing in the possibility of an RBA rate hike by early 2025, yet this hasn’t translated into currency strength for the Aussie.

The culprit appears to be a broader repricing of global monetary conditions. While Australia’s Consumer Inflation Expectations climbed to 4.7% in December, up from November’s three-month low of 4.5%, this signal of persistent price pressures has been overshadowed by the Fed’s reluctance to cut rates further. Commonwealth Bank of Australia and National Australia Bank have both revised their rate hike timelines earlier than previously anticipated, citing stubborn inflation within a capacity-constrained economy.

Swap markets are now pricing a 28% probability of an RBA rate increase in February, with nearly 41% odds assigned to March. August is almost fully priced for tightening.

Fed’s Cautious Stance Keeps Dollar Bid Supported

The US Dollar Index, tracking the greenback’s performance against six major currencies, remains anchored around 98.40. The Fed’s apparent hesitation to deliver additional rate cuts next year is providing steady support for the currency.

Despite a mixed November jobs report—payroll growth of 64K came in slightly above forecasts, but October figures were sharply revised downward, and unemployment ticked up to 4.6%, the highest since 2021—Fed officials remain divided on the need for further monetary easing. The median Fed projection includes just one rate cut for 2026, with some policymakers advocating for no additional reductions at all. Traders, however, are positioning for two cuts next year.

Atlanta Fed President Raphael Bostic signaled on Tuesday that the labor market data did not warrant a policy response, and he favors maintaining rates unchanged. He highlighted that multiple surveys point to elevated input costs and firms’ determination to protect margins through price increases. According to Bostic, “price pressures extend beyond tariff impacts alone, and the Fed should not rush to declare victory.”

CME FedWatch data indicates a 74.4% probability of a hold at January’s Fed meeting, up from approximately 70% a week earlier.

Asia-Pacific Economic Signals Paint Mixed Picture

China’s November retail sales disappointed, rising just 1.3% year-over-year against expectations of 2.9%. Industrial production expanded 4.8% annually, slightly missing the 5.0% forecast. Fixed asset investment declined 2.6% year-to-date, undershooting the expected -2.3% reading.

On the domestic front, Australia’s preliminary manufacturing PMI edged higher to 52.2 in December from 51.6, yet Services PMI softened to 51.0 from 52.8, with the Composite index contracting to 51.1 from 52.6. The unemployment rate held steady at 4.3% in November, below consensus of 4.4%, though employment declined by 21.3K in the prior month.

Technical Breakdown Threatens Further AUD Depreciation

The AUD/USD pair has dipped below the significant 0.6600 confluence zone on Thursday. Technical analysis reveals the pair sitting beneath its ascending channel trend, signaling deteriorating bullish momentum. Trading below the nine-day Exponential Moving Average reflects weakening short-term price dynamics.

Downside risks point toward the psychological 0.6500 level, with the six-month low of 0.6414 (established August 21) representing potential capitulation territory. Upside resistance materializes around the nine-day EMA at 0.6619, followed by the three-month high of 0.6685. Recovery above that would target 0.6707, the peak since October 2024, before testing the upper ascending channel boundary near 0.6760.

For traders monitoring USD to CAD conversion, the strength in the greenback across emerging market currencies reflects the broader risk-off environment and Fed rate pause expectations extending into 2026.