Inflation Signals Clash with Rate Cut Fears: AUD Struggles as RBA Hawkish Bets Rise Against Fed Caution

Markets are wrestling with a familiar paradox this week—strong inflation data that should support currency strength is instead sending the Australian Dollar lower. The AUD/USD pair has extended its losing streak to six consecutive sessions, trading below the critical 0.6600 level despite fresh signals that the Reserve Bank of Australia may tighten policy as soon as February.

The Inflation Surprise That Failed to Support the Aussie

Australia’s consumer inflation expectations jumped to 4.7% in December, up from November’s three-month low of 4.5%. On the surface, this should have strengthened the case for RBA rate hikes and lifted the Australian Dollar. Major banks are certainly reading it that way—Commonwealth Bank and National Australia Bank have both moved forward their forecasts for the first RBA tightening cycle, citing stubborn inflation pressures in a capacity-constrained economy. The central bank’s hawkish hold at its final December meeting reinforced this narrative.

Yet markets aren’t buying the bullish AUD story. Derivative pricing reveals only a 28% probability of a February rate hike, with 41% odds assigned to March and August nearly fully priced in. This cautious positioning suggests traders are waiting for more confirmation before committing capital to the Australian Dollar.

The US Dollar’s Secret Weapon: Fed Uncertainty

Meanwhile, the greenback is drawing strength from an entirely different source. The US Dollar Index (DXY) is holding steady near 98.40, buoyed by fading expectations of further Federal Reserve rate cuts. This shift marks a sharp reversal from months of “pivot” talk.

The December US jobs report painted a mixed picture that has complicated the rate-cut narrative. Payroll growth of 64,000 came in slightly ahead of forecasts, but October data was revised sharply lower, and the unemployment rate ticked up to 4.6%—the highest since 2021. More tellingly, retail sales printed flat month-over-month, signaling that consumer momentum is losing steam.

Atlanta Fed President Raphael Bostic captured the confusion perfectly in a Tuesday blog post. While acknowledging the mixed jobs data, he emphasized that price pressures remain a concern. “Multiple surveys show higher input costs, and firms are determined to preserve margins by raising prices,” Bostic noted, cautioning that the Fed should not “be hasty to declare victory” on inflation.

Fed officials are now split on whether 2026 requires additional easing. The median official expects just one rate cut next year, while some policymakers see no cuts at all. Yet traders are pricing in two cuts. The CME FedWatch tool currently shows a 74.4% probability of a hold at the January Fed meeting, up from 70% a week prior.

Weak China Data Adds Another Layer to the Puzzle

Asia’s growth engine isn’t helping the risk-sensitive Australian Dollar either. China’s November retail sales rose just 1.3% year-over-year, missing the 2.9% forecast and falling well short of October’s 2.9% pace. Industrial production did better at 4.8% YoY, slightly below the 5.0% forecast. Most concerning was fixed asset investment, which contracted 2.6% year-to-date in November, a bigger miss than the expected -2.3%.

This data reinforces worries about China’s economic momentum, weighing on commodities and commodity-linked currencies like the Australian Dollar.

Australia’s Labor Market Adds Nuance

Domestically, Australia’s job market offered mixed signals. Employment fell by 21,300 in November—a sharp reversal from October’s revised 41,100 gain—yet the unemployment rate held steady at 4.3%, below the 4.4% consensus. The Australian Bureau of Statistics also reported a slight improvement in manufacturing conditions: the S&P Global Manufacturing PMI edged up to 52.2 in December from 51.6, though the Services PMI slipped to 51.0 from 52.8, and the Composite PMI fell to 51.1 from 52.6.

Technical Picture: AUD at a Critical Juncture

From a technical standpoint, the AUD/USD pair is testing critical support near 0.6600 and trading below the nine-day Exponential Moving Average, signaling weakening short-term momentum. The pair is also positioned below the ascending channel trend that defined the recent bullish bias.

If selling pressure intensifies, the Australian Dollar could slide toward the psychological 0.6500 level, with the six-month low of 0.6414 (set on August 21) offering the next downside target. On the upside, resistance emerges at the nine-day EMA (0.6619), with a rebreak of the ascending channel boundary needed to refresh the bullish narrative. The three-month high of 0.6685 and subsequent levels at 0.6707 and 0.6760 (the upper channel boundary) would then come into play.

Currency Pairs in Focus

Among major currency pairs, the Australian Dollar weakened most sharply against the Japanese Yen on the day, reflecting risk-off sentiment. For those tracking cross-rates, 4000 AUD converts to approximately 2,642 EUR at current levels, a metric worth monitoring as the Australian Dollar continues to find its footing amid divergent policy signals and weakening global growth indicators.

The coming weeks will hinge on whether the RBA’s hawkish tilt ultimately translates into rate-hike action, and whether Fed officials can bridge their internal divide on 2026 monetary policy. Until then, the Australian Dollar remains caught between conflicting narratives—inflation that suggests higher rates, but global weakness that argues for caution.