AUD/USD Slumps Despite Inflation Inflation Hawkish Signal—Technical Breakdown & Rate Cut Outlook

Australian Dollar weakens for the sixth consecutive session as RBA rate hike odds climb to 28% in February. Despite inflation expectations rising to 4.7%, AUD struggles against USD strength. 103 euro to AUD exchange rates reflect broader currency volatility across emerging markets.

The Australian Dollar (AUD) is under sustained pressure against the US Dollar (USD), marking six days of consecutive losses. While recent inflation data should theoretically support the currency, market dynamics are painting a more complex picture.

The Inflation Paradox: Why Rising Expectations Aren’t Helping AUD

Australia’s Consumer Inflation Expectations climbed to 4.7% in December, up from November’s three-month trough of 4.5%. On the surface, this data point strengthens the case for Reserve Bank of Australia (RBA) tightening, which typically buoys the local currency. Major institutions including Commonwealth Bank of Australia and National Australia Bank have now shifted forecasts to anticipate earlier rate increases than originally projected.

Market pricing reveals the scale of hawkish expectations: swap contracts are currently assigning a 28% probability to a February rate hike, with nearly 41% odds priced into March. By August, markets have nearly fully priced in tightening moves. This positioning emerged after the RBA’s hawkish hold during its final 2025 meeting last week, signaling that policymakers remain focused on curbing stubborn inflation in a capacity-constrained economic environment.

Yet paradoxically, AUD weakness persists. The currency’s struggle highlights a fundamental shift in global rate dynamics—the US Dollar’s outperformance is overwhelming local positive signals.

US Dollar Index Strengthens Amid Fed Rate Cut Skepticism

The US Dollar Index (DXY), which measures USD strength against six major developed-market currencies, continues to hover around 98.40. The greenback’s resilience stems from rapidly fading expectations of additional Federal Reserve rate cuts.

Recent US labor market data delivered mixed signals. November payrolls expanded by 64,000—marginally above forecasts—but October figures underwent a sharp downward revision. Meanwhile, the unemployment rate ticked up to 4.6%, marking the highest level since 2021. Retail sales remained flat month-over-month, signaling that consumer spending momentum is cooling.

Atlanta Federal Reserve President Raphael Bostic provided crucial context in recent remarks, characterizing the jobs report as presenting a “mixed picture” that doesn’t materially alter the Fed’s outlook. Bostic emphasized his preference for unchanged rates at recent policy meetings. More importantly, he highlighted that multiple surveys are flagging higher input costs, with firms determined to maintain profit margins through price increases. His assessment: “Price pressures are not just coming from tariffs—the Fed should not be hasty to declare victory on inflation.”

Fed officials remain divided on 2026 policy direction. The median projection pencils in just one rate cut next year, while some policymakers see zero additional cuts. Meanwhile, derivatives traders are pricing two reductions. The CME FedWatch tool shows Fed funds futures now assigning a 74.4% probability to unchanged rates at the January meeting—up from roughly 70% a week prior.

China’s Economic Slowdown Weighs on Risk Sentiment

Weakness in China’s economic data has further pressured risk-sensitive currencies including AUD. Monday’s National Bureau of Statistics report showed November Retail Sales rising just 1.3% year-over-year, significantly underperforming the 2.9% consensus and October’s 2.9% print. Industrial Production did advance 4.8% YoY, meeting forecasts but below prior month’s 4.9% reading.

Most concerning was Fixed Asset Investment data: the year-to-date YoY figure deteriorated to -2.6% in November, missing the -2.3% expectation. October’s reading was -1.7%, indicating accelerating weakness in investment demand.

Australia’s Domestic Signals Mixed

On the home front, the S&P Global Manufacturing PMI ticked higher to 52.2 in December from 51.6 previously—a modest positive. However, the Services PMI declined to 51.0 from 52.8, and the Composite PMI fell to 51.1 from 52.6. These divergences suggest uneven sectoral momentum.

The Australian Bureau of Statistics reported that the Unemployment Rate held steady at 4.3% in November, beating the 4.4% consensus. However, Employment Change disappointed with a -21.3K decline versus October’s 41.1K increase (revised from 42.2K), and well below the 20K forecast. This suggests labor market momentum may be faltering.

Technical Setup: AUD/USD Breakdown

AUD/USD has pierced the 0.6600 level, breaking below an ascending channel pattern that previously supported bullish sentiment. The pair is now trading beneath its nine-day Exponential Moving Average (EMA), confirming deteriorating short-term momentum.

Downside targets are now in focus. The psychological 0.6500 level looms as the next potential support, followed by the six-month low of 0.6414 established on August 21.

To the upside, recovery would need to reclaim the nine-day EMA near 0.6619. A sustained break above would target the ascending channel boundary and potentially test the three-month high of 0.6685, with further resistance at 0.6707 (the highest since October 2024). The upper channel boundary sits around 0.6760.

Currency Cross Dynamics: AUD Weakness Across the Board

The Australian Dollar weakness extends beyond USD pairs. Against the Japanese Yen, AUD is the clear underperformer among major currencies, reflecting risk-off sentiment. As a proxy for broader currency trends, 103 euro to AUD conversions illustrate how emerging-market and commodity-linked currencies are facing headwinds in the current environment dominated by Fed uncertainty and China slowdown concerns.

The Bottom Line

The Australian Dollar’s six-day losing streak reflects a collision between local hawkish signals and global USD strength. While the RBA looks poised for earlier tightening (supported by 4.7% inflation expectations), the Federal Reserve’s own hawkish hold and investors’ reduced rate-cut expectations have reversed the usual interest-rate advantage for AUD. Add in softening Chinese growth and uneven Australian labor data, and the technical breakdown below 0.6600 becomes less surprising. Until USD strength moderates or risk appetite rebounds, AUD bears maintain the upper hand.