AUD Faces Fresh Headwinds as Inflation Hopes Battle Against Fed Rate Cut Fading

Australian Dollar weakens for the sixth consecutive session despite hawkish inflation signals that could push the RBA toward tightening

The Australian Dollar is struggling against its US counterpart on Thursday, extending a six-day losing streak even as data suggesting sticky price pressures fuel speculation about earlier Reserve Bank of Australia rate action. Markets remain divided—inflation expectations are climbing, central bank policy is turning hawkish, yet the currency can’t catch a bid. This paradox hints at a deeper shift in how traders are weighing global monetary policy divergence.

Inflation Climbing, But Aussie Still Under Pressure

Australia’s Consumer Inflation Expectations climbed to 4.7% in December, up from November’s three-month trough of 4.5%. The uptick may seem supportive for the RBA’s hardline stance, yet the Australian Dollar remains unable to reverse its downward momentum. This disconnect suggests that despite domestic inflation risks, investors are more focused on global factors—primarily the fading prospects of additional Federal Reserve rate reductions.

Major Australian lenders Commonwealth Bank and National Australia Bank have both revised their rate hike timelines forward. Both now anticipate the RBA will commence tightening earlier than their previous forecasts, a shift driven by persistent inflation within a capacity-constrained economy. Swap markets are pricing a 28% probability of a February hike, nearly 41% for March, and August is nearly fully priced in.

Yet this hawkish backdrop has failed to spark AUD strength. The currency continues to lose ground as broader market dynamics overshadow local monetary policy signals.

US Dollar’s Resilience Stems From Cooling Rate Cut Bets

The US Dollar Index, measuring the greenback’s performance against six major currencies, is holding steadily around 98.40. The USD’s firmness reflects dimming expectations for further Federal Reserve easing cycles. Recent labor market data has muddied the easing narrative.

November’s US employment report delivered mixed signals. Payroll growth of 64K came in slightly ahead of expectations, but October revisions were steep and disappointing. The unemployment rate ticked up to 4.6%, marking the highest level since 2021 and suggesting labor market softness. Simultaneously, retail sales flatlined month-over-month, underscoring weakening consumer momentum.

Atlanta Federal Reserve President Raphael Bostic acknowledged the jobs report as “a mixed picture” and indicated preference for leaving rates on hold at the last Fed meeting. Critically, Bostic flagged that “multiple surveys” point to elevated input costs and warned against premature optimism on inflation. He cautioned: “Price pressures are not just coming from tariffs, the Fed should not be hasty to declare victory.”

Fed officials remain internally split on whether 2026 requires additional easing. The median Fed official penciled in just one rate cut for next year, though some policymakers see no cuts at all. Meanwhile, traders are positioning for two reductions. The CME FedWatch tool now implies a 74.4% probability that the Fed holds rates steady at its January meeting, rising from approximately 70% a week prior.

China’s Economic Softness Adds to Global Headwinds

China’s retail sector showed signs of slowdown. November retail sales climbed just 1.3% year-over-year, well below the 2.9% forecast and October’s 2.9% reading. Industrial production advanced 4.8% compared to the 5.0% forecast, while fixed asset investment deteriorated to -2.6% year-to-date versus the expected -2.3% miss.

This collection of weaker Chinese data compounds concerns about global growth momentum, a dynamic that typically weighs on commodity-linked currencies like the Australian Dollar.

Australia’s Labor Market Sends Mixed Signals

The Australian unemployment rate held steady at 4.3% in November, coming in below consensus expectations of 4.4%. However, employment change figures deteriorated sharply. November saw a loss of 21.3K jobs, a dramatic swing from October’s revised gain of 41.1K. This reversal, alongside earlier weakness, may ultimately support the RBA’s rationale for policy tightening despite headline strength in one month.

Manufacturing activity edged higher in December. Australia’s preliminary S&P Global Manufacturing PMI rose to 52.2 from 51.6, though services activity lost momentum. The Services PMI slipped to 51.0 from 52.8, while the Composite PMI declined to 51.1 from 52.6, reflecting uneven economic momentum.

Technical Picture: Key Levels Emerge

The AUD/USD pair is trading below the 0.6600 confluence zone on Thursday. Daily technical analysis reveals the pair is positioned beneath the ascending channel trend, signaling a deterioration in the bullish outlook. The pair is also trading below the nine-day exponential moving average (EMA), confirming weakened short-term momentum.

Downside risks are pronounced. The pair could target the psychological 0.6500 level, followed by the six-month low of 0.6414 set on August 21. A deeper selloff could carry the pair to even lower ground.

Upside recovery attempts hinge on the nine-day EMA positioned at 0.6619. A rebound through this level and back into the ascending channel would restore bullish bias and open the door toward the three-month high of 0.6685, then 0.6707 (the highest since October 2024). Sustained upside could push the pair toward the upper ascending channel boundary near 0.6760.

Current technicals underscore the bearish tilt. Until the pair reclaims the ascending channel and breaks above the nine-day EMA, downside targets remain the path of least resistance. For those tracking 4000 AUD to EUR conversions or broader currency movements, the technical deterioration signals caution in the near term as global monetary policy divergence continues to weigh on commodity currencies like the Australian Dollar.