RBA Rate Hike Bets Surge to 28% in February, But AUD Slides to Support Zone Amid Dollar Strength

The Australian Dollar is experiencing its sixth consecutive session of losses against the US Dollar, despite growing market expectations that the Reserve Bank of Australia could tighten policy as early as February 2025. This divergence between inflation expectations and currency weakness reveals the complex interplay between central bank policy signals and global investor sentiment.

Rising Inflation Expectations Fuel RBA Hawkish Narrative

Australia’s Consumer Inflation Expectations climbed to 4.7% in December, up from November’s three-month low of 4.5%, signaling persistent price pressures in the economy. This data has prompted major Australian banks to accelerate their RBA rate hike forecasts. Commonwealth Bank of Australia and National Australia Bank now expect the central bank to begin tightening sooner than previously anticipated, citing stubborn inflation amid capacity constraints.

The swaps market reflects this shift in expectations, with traders pricing in approximately 28% odds of a February rate hike, nearly 41% for March, and nearly full pricing for an August increase. The RBA’s hawkish hold at its final 2024 meeting reinforced these tightening bets. Yet paradoxically, the Australian Dollar continues to weaken, suggesting that yield differentials alone cannot support the currency when global liquidity preferences shift toward the US.

US Dollar Strength Driven by Fading Fed Easing Bets

The US Dollar Index (DXY) trades near 98.40, supported by diminishing expectations for additional Federal Reserve rate cuts. The December jobs report presented a mixed picture: while payroll growth reached 64K (slightly above forecasts), October figures were substantially revised lower, and the unemployment rate rose to 4.6%—the highest level since 2021.

This labor market cooling has failed to convince Fed officials to pivot toward aggressive easing. Atlanta Fed President Raphael Bostic highlighted that multiple surveys point to elevated input costs, with firms determined to maintain margins through price increases. He warned against premature victory declarations on inflation, emphasizing that price pressures extend beyond tariff-related factors.

Fed officials remain divided on 2026 monetary policy. The median projection suggests just one rate cut next year, while some policymakers see no further reductions. This hawkish stance contrasts sharply with trader expectations of two cuts, creating asymmetric risk favoring a higher-for-longer scenario. The CME FedWatch tool now prices a 74.4% probability of a held rate at January’s FOMC meeting, up from nearly 70% a week prior.

Technical Breakdown: AUD/USD Tests Critical Support

The AUD/USD pair has broken below the 0.6600 confluence support zone, trading below its nine-day Exponential Moving Average. The daily chart reveals the pair has fallen outside the ascending channel that previously defined its bullish structure, signaling a deterioration in short-term momentum.

Downside targets include the psychological 0.6500 level, followed by the six-month low of 0.6414 established on August 21. On the upside, a rebound would first face the nine-day EMA at 0.6619, with resistance at the three-month high of 0.6685. Further strength could target 0.6707 (the highest since October 2024) and the upper channel boundary near 0.6760.

For traders monitoring cross-currency relationships, the AUD weakness extends to most major pairs, with particular pressure against the Japanese Yen reflecting broader risk-off sentiment.

Macroeconomic Headwinds From China and Australia

China’s economic data painted a weaker picture than anticipated. Retail Sales rose just 1.3% year-over-year in November versus the 2.9% forecast, while Industrial Production increased 4.8% compared to 5.0% expectations. Fixed Asset Investment deteriorated to -2.6% year-to-date, missing the expected -2.3% figure.

On the Australian domestic front, the Manufacturing PMI ticked up to 52.2 in December from 51.6, yet Services PMI slipped to 51.0 from 52.8, indicating mixed sectoral momentum. The Unemployment Rate held steady at 4.3% in November, below the 4.4% consensus, though employment contracted by 21.3K—a reversal from October’s 41.1K gain.

The Bottom Line: Policy Divergence Without Currency Support

The RBA’s hawkish inflation narrative has failed to provide sustained support for the Australian Dollar as the US Dollar benefits from both absolute yield advantages and risk-off flows. While an RBA rate hike remains increasingly probable by Q1 2025, the AUD/USD pair’s technical breakdown suggests near-term downside risks could dominate the narrative. Traders should monitor key support at 0.6600 and 0.6500, while watching for signals of Fed pivot timing as a potential catalyst for AUD recovery.

For those tracking currency conversions—such as 240 pounds to AUD—current volatility presents both opportunity and risk, with the Australian Dollar’s weakness expanding the denominator in cross-rate calculations.