AUD Remains Under Pressure as Inflation Expectations Climb, But RBA Tightening Bets Support Recovery Hopes

The Australian Dollar continues its downward trend despite inflation data supporting a near-term rate hike from the Reserve Bank of Australia. Consumer price expectations climbed to 4.7% in December, up from 4.5% the previous month, signaling persistent inflationary pressures. Meanwhile, the US Dollar draws strength as Federal Reserve rate cut odds fade into the background.

Technical Breakdown: AUD/USD Faces Critical Support Zones

The AUD/USD pair has dropped below the 0.6600 psychological level, marking the sixth consecutive day of weakness. Daily chart analysis reveals the pair trading beneath the nine-day Exponential Moving Average (EMA), signaling diminished short-term momentum and a breach below the ascending channel that previously supported bullish positioning.

Looking downward, traders are watching the 0.6500 mark as the next significant level, with the August 21 six-month low of 0.6414 looming as a major support floor. On the recovery front, the nine-day EMA sits at 0.6619, while a move back into the ascending channel would open doors toward the three-month high of 0.6685. Beyond that, resistance clusters around 0.6707 (highest since October 2024) and the upper channel boundary near 0.6760.

The RBA Inflation Story: Hawkish Hold Sets Stage for February Tightening

Australia’s Consumer Inflation Expectations data—now at 4.7%, up from November’s 4.5%—reinforces the case for monetary policy tightening. Both Commonwealth Bank of Australia and National Australia Bank have revised their forecasts upward, expecting the RBA to commence rate increases sooner than previously anticipated. This hawkish positioning follows the central bank’s firm stance at its final 2024 meeting, where officials held rates steady despite market pressures.

Swap markets are now pricing in a 28% probability of a February rate hike, climbing to nearly 41% for March, with the August window almost fully factored in. The Reserve Bank’s concerns center on an inflation-constrained economy struggling to cool price pressures even as activity shows signs of deceleration.

US Dollar Strengthens Amid Dimming Rate Cut Expectations

The US Dollar Index (DXY), tracking the greenback against six major currencies, holds firm around 98.40 as traders reassess Federal Reserve easing expectations. The November US jobs report delivered mixed signals—payroll growth of 64K came in slightly above forecasts, but prior months saw sharp downward revisions, and unemployment ticked up to 4.6%, the highest reading since 2021.

Retail sales stagnated month-over-month, adding to signs that consumer demand is losing steam. Federal Reserve officials appear divided on 2026 policy direction. While the median Fed official projects just one rate cut next year, some policymakers see no further reductions warranted. Traders, however, are betting on two cuts.

Atlanta Fed President Raphael Bostic signaled a preference for holding rates steady, emphasizing that price pressures remain resilient across multiple survey categories. “Firms are determined to safeguard margins by lifting prices,” Bostic noted, cautioning against premature declarations of victory on inflation. The CME FedWatch tool now prices a 74.4% probability of unchanged rates at January’s meeting, up from 70% a week prior.

Global Economic Cross-Currents

China’s retail sector showed weakness in November, with sales rising just 1.3% year-over-year versus the 2.9% consensus and prior month’s matching gain. Industrial production accelerated to 4.8% YoY, though still below the 5.0% forecast. Fixed asset investment disappointed, posting -2.6% YTD compared to the -2.3% expectation.

Australia’s manufacturing output provided modest cheer, with the S&P Global PMI edging up to 52.2 in December from 51.6, while services activity retreated to 51.0 from 52.8. The jobless rate held steady at 4.3% in November, below the 4.4% consensus, though employment fell by 21.3K during the month—a sharp reversal from October’s upward revised gain of 41.1K.

What’s Next for AUD/USD

The Australian Dollar faces a precarious technical setup, pinned between RBA rate hike optimism and broader dollar strength driven by Fed caution. Traders are weighing whether Australia’s inflation narrative and potential February tightening can overcome the gravitational pull of US monetary policy divergence and global growth headwinds. The 0.6414 support level could become a critical inflection point for determining the pair’s next directional move.