AUD Slides Deeper Despite Inflation Signals: RBA Rate Hike Bets Surge While USD Holds Firm

The Australian Dollar continues its six-day losing streak against the US Dollar as conflicting signals confuse traders. While inflation expectations climb and rate-hike odds mount, the AUD struggles to find footing—a textbook case of what happens when markets price in hawkish central bank action without seeing actual tightening yet.

The Setup: Consumer Inflation Expectations Jump, But AUD Still Falls

Here’s the paradox that’s been nagging traders all week: Australia’s Consumer Inflation Expectations climbed to 4.7% in December, rebounding from November’s three-month low of 4.5%. This data should be bullish for the Australian Dollar, right? Higher inflation expectations typically signal the need for rate hikes, which attracts yield-seeking investors to the currency.

Yet the AUD/USD pair is trading below 0.6600, having lost ground for six consecutive days. Commonwealth Bank of Australia and National Australia Bank are now projecting the Reserve Bank of Australia will hike rates as early as February—earlier than they previously expected. The RBA’s hawkish hold at its final 2025 meeting last week only reinforced this view. Swap markets now price in a 28% probability of a February rate hike, jumping to nearly 41% for March, with August almost fully priced in.

So if the case for AUD strength is there, what’s going wrong? The answer lies in the USD side of the equation.

Why the US Dollar Keeps Winning: Fed Rate Cut Bets Evaporate

The US Dollar Index (DXY), which tracks the greenback against six major currencies, is holding steady around 98.40. The currency’s resilience stems from one simple fact: the market is rapidly abandoning expectations for additional Federal Reserve rate cuts.

The November US jobs report painted a mixed picture. Payroll growth came in at 64K—marginally above forecast—but October’s numbers were revised sharply lower. The unemployment rate climbed to 4.6%, the highest level since 2021, signaling a gradually cooling labor market. Meanwhile, retail sales flatlined month-over-month, suggesting consumer demand is losing momentum.

You’d think this would be bearish for the USD. Normally, a weakening labor market triggers Fed pivot expectations. But Atlanta Fed President Raphael Bostic threw a wrench into that narrative. In a Tuesday blog post, Bostic dismissed the jobs report as a mixed picture and stated it doesn’t change the Fed’s outlook. More importantly, he noted that “multiple surveys” indicate firms are facing higher input costs and are determined to protect margins by raising prices. His warning—“Price pressures are not just coming from tariffs, the Fed should not be hasty to declare victory”—suggests rate cuts will remain scarce.

The CME FedWatch tool reflects this sentiment. Fed funds futures now price an implied 74.4% probability of a rate hold at January’s FOMC meeting, up from nearly 70% a week prior. Fed officials are split on whether more easing is needed in 2026; the median projection pencils in just one cut next year, while some policymakers see zero cuts. Traders, however, are somewhat more optimistic, anticipating two cuts.

China’s Slowdown Adds Another Layer to the Puzzle

China’s economic data released Monday didn’t help risk sentiment. Retail Sales rose just 1.3% year-over-year in November versus the 2.9% expected and 2.9% seen in October. Industrial Production climbed 4.8% YoY, beating the 5.0% forecast but undershooting the prior 4.9% reading. More concerning, Fixed Asset Investment disappointed at -2.6% year-to-date YoY in November versus the expected -2.3%, a deterioration from October’s -1.7%.

This slowdown matters for the Australian Dollar because China is Australia’s largest trading partner. Softer Chinese demand could weigh on the AUD’s medium-term outlook, even as rate hike expectations support it in the near term.

Australia’s Labor Market Muddles the Picture

The Australian Bureau of Statistics last week reported the Unemployment Rate held steady at 4.3% in November, beating the 4.4% consensus. But employment change data was disappointing: -21.3K in November versus +41.1K in October (revised from +42.2K) and the forecasted +20K. This divergence—unemployment flat while jobs fell—suggests mixed labor market dynamics that don’t clearly signal strong economic momentum.

Australia’s preliminary S&P Global Manufacturing PMI did edge up to 52.2 in December from 51.6 previously, a marginal improvement. However, the Services PMI slipped to 51.0 from 52.8, and the Composite PMI fell to 51.1 from 52.6. So while manufacturing stabilized slightly, the services sector (which dominates Australia’s economy) softened.

The Technical Picture: Where AUD/USD Heads Next

From a chart perspective, the AUD/USD pair is positioned below the ascending channel trend on the daily timeframe, signaling weakening bullish momentum. It’s also trading below the nine-day Exponential Moving Average (EMA), confirming short-term momentum remains bearish.

Downside targets to watch:

• Psychological level of 0.6500
• Six-month low of 0.6414 (August 21)

Upside resistance:

• Nine-day EMA at 0.6619
• Three-month high of 0.6685
• October 2024 peak at 0.6707
• Upper ascending channel boundary near 0.6760

For context, if you’re thinking about cross-pair dynamics, 380 USD converts to roughly 620 NZD, showing how the greenback’s strength impacts regional currencies more broadly.

What’s the Trade?

The Australian Dollar faces a classic squeeze: domestic inflation and rate-hike expectations should support it, yet Fed rate-cut bets evaporating and China’s slowdown are weighing it down. Traders should watch for:

1. Fed communication – Any hawkish signals from Fed officials could cap USD strength, benefiting AUD
2. RBA policy signals – Confirmation of a February rate hike would accelerate AUD recovery
3. China’s next economic releases – Softer data could extend AUD weakness regardless of rate hike expectations
4. Technical breakdown – A close below 0.6500 could accelerate selling toward 0.6414

The next few weeks will be critical in determining whether the AUD’s rate-hike premium finally kicks in, or whether Fed resilience and Chinese weakness keep the greenback bid.