AUD Under Pressure Despite Inflation Signals – Will February RBA Hike Materialize?

Technical Breakdown Reveals Critical Support Levels for AUD/USD

The Australian Dollar continues its sixth consecutive session of weakness versus the US Dollar, with AUD/USD now trading below the pivotal 0.6600 mark. On the daily chart, the currency pair has slipped beneath its ascending channel trend, suggesting a loss of bullish momentum. The nine-day Exponential Moving Average sits at 0.6619, while the pair is trading noticeably below this level, indicating deteriorating short-term price action.

From a technical perspective, traders are eyeing the psychological support at 0.6500. A breakdown below this zone would expose the six-month low of 0.6414, established back in August. On the recovery side, the pair would need to clear 0.6619 to regain footing within the ascending channel. A sustained push above the channel could pave the way toward the three-month high of 0.6685, with further resistance emerging around 0.6707 and potentially 0.6760 at the upper channel boundary.

Inflation Data Doesn’t Inspire AUD Bulls Despite Hawkish Implications

December’s Consumer Inflation Expectations data showed a notable rise to 4.7%, climbing from November’s three-month low of 4.5%. On paper, this reading supports the Reserve Bank of Australia’s more hawkish positioning and lends credibility to earlier-than-expected rate hikes. Commonwealth Bank of Australia and National Australia Bank have both revised their tightening timelines forward, citing persistent inflationary pressures in a capacity-constrained economy.

The RBA’s recent hawkish hold at its final 2025 meeting reinforced expectations for policy normalization. Swaps markets are currently pricing a 28% probability of a February rate hike, with March odds reaching approximately 41%, and August appearing nearly fully priced for increases. Yet despite these supportive signals for AUD, the currency remains on the back foot, suggesting that other factors are weighing more heavily on sentiment.

US Dollar Firm Amid Fading Fed Easing Bets – The Real Driver of AUD Weakness

The US Dollar Index, tracking the greenback against six major currencies, holds steady around 98.40, buoyed by increasingly skeptical market views on additional Federal Reserve cuts. Recent labor market data painted a mixed picture: November payrolls grew by 64K, slightly above expectations, though October figures underwent significant downward revision. Unemployment ticked up to 4.6%, marking the highest rate since 2021, hinting at gradual labor market cooling.

Consumer demand metrics are equally subdued. Retail sales came in flat month-over-month, reinforcing impressions that spending momentum is waning. Atlanta Fed President Raphael Bostic acknowledged the “mixed picture” in recent jobs data and indicated a preference for maintaining rates at their current level. More tellingly, Bostic highlighted that multiple surveys point to elevated input costs, with firms determined to defend margins through price increases. His warning that “price pressures extend beyond tariffs alone” suggests the Fed should not rush to declare inflation progress.

The Federal Reserve itself remains fragmented on 2026 policy direction. Policymakers collectively penciled in just one rate reduction next year, with some dissenting voices arguing for no cuts whatsoever. Meanwhile, traders are betting on two reductions. CME FedWatch data reveals that fed funds futures are now pricing a 74.4% probability of rates holding steady at January’s Fed meeting, up from nearly 70% just a week prior.

Global Economic Backdrop Adds Complexity

China’s economic releases revealed softer-than-expected momentum. November retail sales grew 1.3% year-over-year, missing the 2.9% forecast and marking a deceleration from October’s 2.9%. Industrial production came in at 4.8% YoY, falling short of the 5.0% forecast but slightly above October’s 4.9%. Fixed Asset Investment deteriorated further, arriving at -2.6% year-to-date YoY, overshooting the expected -2.3% miss.

On the Australian domestic front, manufacturing activity showed marginal improvement with the S&P Global PMI rising to 52.2 in December from 51.6, though services sector momentum faltered as the Services PMI dropped to 51.0 from 52.8. The Composite PMI similarly retreated to 51.1 from 52.6. Labor market conditions remained stable, with the unemployment rate holding at 4.3% in November—below the 4.4% consensus. However, employment gains turned negative, with a -21.3K print in November contrasting sharply against October’s revised +41.1K.

The Bottom Line: AUD Bears Maintain Control

The Aussie’s weakness persists despite otherwise supportive inflation and rate hike expectations, a dynamic that underscores the outsized influence of US Dollar strength. As long as Fed rate cut expectations remain subdued and the greenback continues drawing support, AUD/USD faces persistent downside pressure. For reversal signals, traders will need to see a technical break above 0.6619 alongside a meaningful shift in Fed easing sentiment.