AUD/USD Faces Downward Pressure as Inflation Signals Clash with Fed Caution

The Australian Dollar continues retreating against its US counterpart, marking six consecutive days of weakness for the AUD/USD pair on Thursday. This extended selloff persists despite mixed signals from Australia’s inflation data and growing market expectations of a potential Reserve Bank of Australia (RBA) rate hike as soon as February.

Technical Weakness Intensifies Below Key Support Zone

The AUD/USD pair has slipped below the critical 0.6600 support level, revealing deteriorating technical conditions on the daily timeframe. The currency pair now trades beneath both the ascending channel trend and the nine-day Exponential Moving Average (EMA) at 0.6619, signaling waning momentum in the short term.

Downside risks appear pronounced, with traders eyeing the psychological level of 0.6500 as the next potential target. Should selling pressure intensify further, the six-month low of 0.6414 from August 21 could come into focus. A stabilization attempt might find resistance around the nine-day EMA, though a meaningful recovery would require breaking back above the ascending channel to challenge the three-month peak of 0.6685 and subsequently the 0.6707 level, the strongest point since October 2024.

What’s Driving USD Strength?

The US Dollar Index (DXY) maintains footing near 98.40, drawing support from receding expectations of additional Federal Reserve rate cuts. Recent economic data has reinforced this cautious Fed narrative.

November’s employment report delivered a nuanced picture: payroll additions of 64K exceeded forecasts slightly, yet October payroll figures were revised sharply downward. The unemployment rate climbed to 4.6%, marking the highest level since 2021, suggesting gradual labor market softening. Adding to demand concerns, retail sales registered flat for the month, indicating cooling consumer spending momentum.

Atlanta Fed President Raphael Bostic acknowledged the mixed labor data but signaled no immediate policy shift. More notably, Bostic highlighted persistent input cost inflation, warning that firms remain committed to maintaining profit margins through price increases—a dynamic that extends beyond tariff-related pressures. His 2026 GDP projection stands at approximately 2.5%.

The policy divide within the Federal Reserve remains evident. While the median Fed projection pencils in just one rate cut for 2026, some officials see no cuts warranted. Market traders, however, anticipate two reductions next year. According to CME FedWatch futures pricing, the probability of unchanged rates at January’s Fed meeting stands at 74.4%, up from roughly 70% a week prior.

Australian Inflation Backdrop and RBA Rate Hike Prospects

Despite the AUD’s weakness, Australia’s inflation expectations ticked higher in December, rising to 4.7% from November’s three-month low of 4.5%. This uptick reinforces the RBA’s hawkish posture, particularly following the central bank’s rate hold at its final December 2025 meeting.

Major Australian banks—Commonwealth Bank of Australia and National Australia Bank—have both revised their forecasts to reflect an earlier tightening timeline than originally anticipated. The catalyst remains stubborn inflation amid a capacity-constrained economy. Swap pricing currently assigns a 28% probability to a February rate hike, nearly 41% for March, with August almost fully priced in for the year ahead.

Mixed Signals from Australia’s Economic Data

Australia’s manufacturing sector showed modest resilience: the S&P Global Manufacturing PMI advanced to 52.2 in December from 51.6 previously. However, the Services PMI retreated to 51.0 from 52.8, while the Composite PMI declined to 51.1 from 52.6, suggesting uneven momentum across the economy.

On the labor front, Australia’s unemployment rate held steady at 4.3% in November, undercutting market expectations of 4.4%. However, employment change data painted a darker picture: -21.3K positions were lost in November compared to an upwardly revised 41.1K gain in October, falling well short of the 20K consensus forecast.

Broader Context: China’s Economic Slowdown

Regional growth headwinds persist. China’s National Bureau of Statistics reported November retail sales at 1.3% year-over-year, missing the 2.9% forecast and October’s 2.9% reading. Industrial production grew 4.8% year-over-year, undershooting the 5.0% projection and prior 4.9% outcome. Fixed asset investment contracted further, posting -2.6% year-to-date versus the anticipated -2.3%, down from October’s -1.7% reading.

AUD/USD Forecast: Competing Narratives

The AUD/USD pair embodies competing forces: while RBA rate hike prospects provide potential support for the Australian Dollar, persistent US Dollar strength—rooted in diminishing Fed cut expectations and relative economic resilience—continues to dominate near term. The breakdown below 0.6600 suggests bears maintain the upper hand, though consumer inflation signals and swap-implied rate hike probabilities could reignite AUD buying interest if economic conditions stabilize.

The currency pair’s direction hinges on which narrative ultimately prevails: Australian monetary policy tightening or delayed Fed easing. Technical positioning favors further downside in the near term, but the fundamental backdrop remains contested as both central banks navigate inflation management in an increasingly complex global environment.