AUD Under Pressure Amid Rate Hike Signals, Yet Inflation Expectations Climb

• Australian Dollar records extended weakness against the US Dollar, though recent inflation sentiment shifts could reshape market positioning. - Consumer price expectations in Australia surged to 4.7% in December, up from 4.5%, signaling persistent cost pressures. - The US Dollar strengthens as Fed rate cut expectations fade, leaving the AUD/USD pair vulnerable at critical technical thresholds.

The Australian Dollar faced its sixth consecutive day of losses against the US Dollar on Thursday, but emerging signals from inflation data and labor market shifts suggest a more nuanced picture ahead. Market participants are increasingly betting on monetary tightening from the Reserve Bank of Australia (RBA) as early as February, with swap contracts now pricing in a 28% probability of action in that month alone.

Inflation Expectations Signal RBA’s Hawkish Opportunity

Recent consumer sentiment figures have painted a compelling backdrop for central bank tightening. Australia’s Consumer Inflation Expectations climbed to 4.7% in December from November’s recent low of 4.5%, reinforcing that households remain concerned about purchasing power erosion. This uptick provides ammunition for the RBA’s hawkish positioning, with major Australian banks now front-loading their rate hike forecasts.

The unemployment rate in Australia has also become a critical variable in this equation. While the jobless rate stabilized at 4.3% in November—below consensus expectations of 4.4%—employment data revealed a sharper contraction with a -21.3K swing in November from October’s revised +41.1K reading. This labor market cooling, paired with sticky inflation expectations, creates a paradox: cooling activity alongside stubborn price pressures typical of capacity-constrained economies.

Banks including Commonwealth Bank and National Australia Bank have now shifted their forecasts closer, anticipating RBA action well before mid-year. Swaps markets price in nearly 41% odds for a March move, with August pricing approaching full expectation of tightening completion by year-end.

US Dollar Gains Ground as Fed Cut Bets Collapse

The US Dollar Index (DXY) continues holding firm around 98.40 as Federal Reserve rate cut expectations evaporate. The US employment report proved mixed—November payrolls rose just 64K versus forecasts, while jobless claims ticked higher to 4.6%, the highest since 2021. Yet Fed officials remain divided on whether additional easing makes sense in 2026.

Atlanta Federal Reserve President Raphael Bostic explicitly cautioned against premature rate cut assumptions, noting that multiple surveys point to elevated input costs and firm-level margin defense through pricing power. The CME FedWatch tool now shows 74.4% probability of a rates-unchanged outcome at January’s policy meeting, up from 70% a week prior.

Separately, Chinese economic momentum faltered further. Retail sales growth collapsed to just 1.3% year-over-year in November versus 2.9% anticipated, while fixed-asset investment declined 2.6% year-to-date, missing the -2.3% forecast. These readings dimmed reflation hopes in Asia-Pacific, providing additional USD support.

Technical Breakdown Points to 0.6500 Zone

The AUD/USD pair dropped below the 0.6600 confluence support level, breaking through its ascending channel on the daily chart. Nine-day exponential moving average (EMA) resistance sits at 0.6619, while weakness could accelerate toward the psychological 0.6500 mark before potentially testing the August 2024 six-month floor at 0.6414.

Upside recovery would require clearing the EMA and reasserting the ascending channel framework. A sustained break above 0.6685 (three-month high) could target 0.6707 and eventually the upper channel boundary near 0.6760. The pair currently trades with downside bias intact.

Cross-Currency Dynamics: AUD Weakest Against JPY

Australian Dollar momentum deteriorated broadly across major pairs. Against the Japanese Yen, the AUD fell 0.27%, the steepest decline tracked among major currency pairs. Relative weakness against the British Pound (-0.16%), Euro (-0.10%), and US Dollar (-0.19%) underscores broad-based AUD softness despite the inflation expectations support.

Currency heat mapping shows the AUD as the session’s clear underperformer, with negative correlation dynamics dominating as risk sentiment ebbed and safe-haven flows accelerated.