AUD Continues to Slide on Thursday Despite Inflation Data Signaling RBA Action

The Australian Dollar extends its losing streak as it trades below 0.6600, with mounting expectations for an RBA rate hike by February weighing on sentiment. Consumer inflation expectations in Australia rose to 4.7% in December, up from 4.5% in November, providing support for tightening bias. The US Dollar strengthens as markets dial back rate cut expectations from the Federal Reserve.

The AUD has weakened for six consecutive trading days against the USD as mixed signals compete for investor attention. While Australia’s inflation expectations data strengthened the case for RBA tightening, the currency continues to struggle against a resilient greenback.

RBA Tightening Bets Intensify on Inflation Momentum

Australia’s Consumer Inflation Expectations climbed to 4.7% in December from November’s three-month low of 4.5%, reinvigorating the case for the Reserve Bank of Australia to shift toward a hawkish stance. This development has prompted major Australian banks—Commonwealth Bank and National Australia Bank—to accelerate their rate hike forecasts, now expecting tightening sooner than initially anticipated.

The central bank’s hawkish hold during its final 2025 meeting last week set the stage for near-term policy shifts. Swap markets are currently pricing a 28% probability of a February rate increase, with March carrying nearly 41% odds. August is almost fully priced for a hike, suggesting markets expect multiple moves throughout 2026. Despite these hawkish signals, the AUD struggles to capitalize on tightening expectations, pointing to overpowering USD strength.

Federal Reserve Rate Cut Bets Evaporate, Supporting Greenback

The US Dollar Index, which benchmarks the greenback against six major currencies, hovers near 98.40 as Fed rate cut expectations continue to fade. The latest US jobs report revealed payroll growth of 64K, marginally exceeding forecasts, while October figures faced downward revisions. The unemployment rate ticked up to 4.6%, the highest level since 2021, signaling a gradually cooling labor market.

Retail sales remained flat month-over-month, further underlining weakening consumer demand momentum. Atlanta Fed President Raphael Bostic commented that the jobs report presented a mixed picture, with no significant implications for the policy outlook. He stressed preference for maintaining rates unchanged at the Fed’s latest meeting and flagged concerns about persistent input costs and margin-preservation pricing strategies among firms. According to Bostic, “Price pressures extend beyond tariff impacts alone, and the Fed should exercise caution before declaring inflation victory.” He projects 2026 GDP growth around 2.5%.

Fed officials remain divided on the necessity for additional monetary easing in 2026. The median official projection pencils in just one rate cut next year, while some policymakers envision no further reductions. Traders, however, anticipate two cuts. The CME FedWatch tool shows Fed funds futures pricing a 74.4% chance of a rates hold at January’s FOMC meeting, up from approximately 70% a week prior.

Chinese Economic Data Underwhelms, Adding Headwind

China’s Retail Sales rose just 1.3% year-over-year in November, missing the 2.9% forecast and slowing from October’s 2.9% growth. Industrial Production expanded 4.8% annually, below the 5.0% expectation and prior 4.9% reading. Fixed Asset Investment contracted 2.6% year-to-date, falling short of the expected -2.3% decline and deteriorating from October’s -1.7% figure.

These softer Chinese metrics weighed on risk sentiment, offering limited support for commodity-linked currencies including the Australian Dollar.

Australian Economic Indicators Paint Mixed Picture

Australia’s preliminary S&P Global Manufacturing PMI inched up to 52.2 in December from 51.6 previously. However, Services PMI slipped to 51.0 from 52.8, while the Composite PMI fell to 51.1 from 52.6, suggesting uneven momentum across the economy.

The Australian Bureau of Statistics reported the Unemployment Rate holding steady at 4.3% in November, beating market consensus of 4.4%. Employment Change posted a decline of 21.3K in November compared to October’s revised 41.1K, missing the 20K consensus forecast. This employment weakness contrasts sharply with inflation expectations, creating policy dilemma for the RBA.

Technical Breakdown: AUD/USD Breaks Critical Support

The AUD/USD pair trades below 0.6600 on Thursday, with technical positioning deteriorating. Daily chart analysis reveals the pair positioned beneath the ascending channel trend, indicating a weakening bullish bias. Trading below the nine-day Exponential Moving Average signals reduced short-term momentum.

The pair faces downside risk toward the psychological 0.6500 level, with the six-month low of 0.6414 (August 21) serving as the next key support. On the rebound side, the nine-day EMA at 0.6619 represents immediate resistance—a level that when breached could translate to approximately 345 USD to AUD conversion reference points for traders monitoring broader cross-rate dynamics.

Should the pair reclaim this level, the three-month high of 0.6685 and October 2024’s peak of 0.6707 come into focus. A sustained recovery would need to overcome the upper ascending channel boundary near 0.6760 to revive the broader bullish narrative.

The Australian Dollar emerged as the weakest performer among major currencies on the day, reflecting the cumulative weight of stronger USD dynamics despite supportive RBA tightening signals.