AUD/USD Under Pressure: RBA Rate Hike Bets Heat Up Despite Inflation Surprise

The Australian Dollar continues its losing streak against the greenback, but growing expectations of early RBA tightening could provide a lifeline for the currency. Traders are watching the AUD/USD pair closely as conflicting signals emerge from both sides of the Pacific. While the Aussie extends its downward momentum for a sixth consecutive day, the inflation data tells a different story—one that could reshape rate expectations in 2025.

What’s Driving the AUD/USD Forecast?

Australia’s Consumer Inflation Expectations jumped to 4.7% in December, up from November’s 4.5%, catching some market participants off guard. This uptick is giving the RBA ammunition for a hawkish stance and has major banks reconsidering their rate hike timelines. Commonwealth Bank and NAB are now positioning for an RBA tightening cycle sooner than previously anticipated, with February rate hike odds climbing to 28% according to swap pricing—a meaningful shift from where the market stood just weeks ago.

The Reserve Bank’s resolute hold on rates at its final 2025 meeting sent clear signals about the central bank’s inflation-fighting resolve in a capacity-constrained economy. For AUD bulls, this should theoretically provide support. Yet the currency remains under pressure as the Fed picture complicates the narrative.

US Dollar Strength Amid Fed Pause Expectations

The US Dollar Index (DXY) is holding its ground around 98.40, buoyed by diminishing expectations of aggressive Fed rate cuts. Recent labor market data painted a mixed picture: while November payrolls came in slightly above forecasts at 64K, October figures were revised sharply downward, and the unemployment rate ticked up to 4.6%—the highest level since 2021.

Fed officials remain divided on the path forward. The median Fed projection shows just one rate cut for 2026, though some policymakers see no further easing. Meanwhile, traders are pricing in two cuts, creating uncertainty around the AUD/USD forecast. Atlanta Fed President Raphael Bostic cautioned against premature victory declarations on inflation, noting that firms are determined to defend margins by raising prices despite softer consumer demand.

The CME FedWatch tool is now pricing a 74.4% probability of unchanged rates at the next Fed meeting in January, up from 70% a week prior. This hawkish repricing is helping the USD absorb the AUD’s rally attempts.

Technical Levels: Where Next for AUD/USD?

On the charts, AUD/USD is trading below the crucial 0.6600 level, signaling weakening bullish momentum. The pair sits beneath its nine-day Exponential Moving Average and has broken below the ascending channel that previously supported bullish sentiment.

Downside targets are crystallizing: a drop toward the psychological 0.6500 level is possible, with the six-month low of 0.6414 (set on August 21) looming as a deeper support zone. On the flipside, a recovery would need to reclaim the nine-day EMA at 0.6619 to restore confidence. A sustained push above this level could test the three-month high of 0.6685, followed by 0.6707 (the highest level since October 2024).

The Bigger Picture: China Softness Adding Pressure

Global growth concerns are also weighing on the AUD, which carries significant China exposure. November saw China’s retail sales rise just 1.3% year-over-year, missing the 2.9% forecast. Industrial production grew 4.8%, coming in below the 5.0% expected, while fixed asset investment deteriorated to -2.6% year-to-date versus the -2.3% consensus.

Australia’s own data showed mixed signals: manufacturing activity improved modestly to 52.2 in December from 51.6, but services softened to 51.0 from 52.8. The unemployment rate remained steady at 4.3%, though employment fell by 21.3K in November, marking a significant shift from October’s 41.1K gain.

Looking Ahead

The AUD/USD forecast remains tilted to the downside in the near term, caught between RBA hawkishness and Fed pause expectations that are currently favoring the US Dollar. Traders should monitor upcoming Fed communications closely, while watching for any shifts in RBA guidance at upcoming meetings. The 0.6500-0.6600 zone will be critical to watch as support levels.