AUD Faces Downward Pressure Amid Mixed Inflation Signals and US Dollar Strength

The Australian Dollar (AUD) has depreciated for six consecutive trading sessions against the US Dollar (USD), with market focus shifting to conflicting inflation expectations and central bank divergence. Despite inflation concerns supporting a potential rate hike scenario, the Aussie continues to slide lower as US monetary policy uncertainty favors the greenback.

Inflation Expectations Rise, But RBA Rate Hike Timing Remains Contested

Australia’s Consumer Inflation Expectations climbed to 4.7% in December, recovering from November’s three-month trough of 4.5%. This uptick would normally bolster the Reserve Bank of Australia’s (RBA) case for monetary tightening, potentially paving the way for an early 2025 rate increase.

Major Australian financial institutions, including Commonwealth Bank and National Australia Bank, have adjusted their forecasts to anticipate RBA tightening sooner than previously expected. Their reassessment follows the central bank’s resolute stance during its latest policy meeting, where officials maintained rates despite mounting price pressures in a supply-constrained economy.

Market pricing currently reflects a 28% probability of a February rate hike, while March odds stand at approximately 41%. However, this hawkish positioning has failed to sustain AUD strength, suggesting investors are increasingly skeptical about the RBA’s willingness to act decisively in early 2025.

US Dollar Gains Ground as Rate Cut Expectations Evaporate

The US Dollar Index (DXY), tracking the greenback’s performance against six major currency peers, trades around 98.40, buoyed by diminishing expectations for additional Federal Reserve rate reductions. This shift represents a significant reversal from earlier projections.

Recent US labor market data painted a complicated picture. November payroll additions reached 64,000—marginally above forecasts—yet October figures were substantially revised downward. The unemployment rate simultaneously rose to 4.6%, marking its highest level since 2021, signaling labor market deceleration. Consumer spending data proved equally soft, with retail sales flat month-over-month.

Atlanta Federal Reserve President Raphael Bostic acknowledged the mixed employment report but emphasized that monetary policy should remain patient. He highlighted rising input cost pressures across multiple industries and warned against premature declarations of victory over inflation. With inflation concerns persisting, the Fed’s projected pathway suggests just one rate cut throughout 2026, compared to trader expectations of two reductions.

CME FedWatch tools indicate futures markets are pricing a 74.4% probability that the Fed will maintain rates at its January meeting, up from approximately 70% a week prior.

Asian Economic Data Adds Further Complexity

China’s November retail sales expanded only 1.3% year-over-year, falling significantly short of the 2.9% consensus forecast and marking a deceleration from October’s 2.9%. Industrial production grew 4.8% annually, below the anticipated 5.0% and the prior month’s 4.9%.

Fixed asset investment data disappointed further, registering a -2.6% year-to-date decline versus the expected -2.3% contraction. This deterioration compared unfavorably to October’s -1.7% reading, signaling persistent headwinds in China’s economic trajectory.

In Australia, preliminary PMI data revealed mixed momentum. Manufacturing activity edged higher to 52.2 from 51.6 in December, yet services contracted to 51.0 from 52.8. The composite index fell to 51.1 from 52.6, reflecting moderation across sectors.

Employment conditions also softened, with Australia’s unemployment rate holding steady at 4.3% in November—below the 4.4% consensus but following an employment decline of 21,300 positions in November versus a revised gain of 41,100 in October.

Technical Breakdown: AUD/USD Approaches Critical Support

The AUD/USD pair has fallen below the 0.6600 threshold, slipping beneath an ascending channel trend that previously supported bullish momentum. Trading underneath the nine-day Exponential Moving Average (EMA) at 0.6619 signals deteriorating short-term technicals.

Should weakness persist, AUD/USD could descend toward the 0.6500 psychological barrier, with further downside potentially targeting the six-month low of 0.6414 from August 21. Upside recovery would require a push above the nine-day EMA to restore bullish structure, potentially unlocking the three-month high near 0.6685 and the post-October 2024 peak around 0.6707. Sustained advances beyond these levels would challenge the ascending channel’s upper boundary near 0.6760.

For broader currency perspective, the Australian Dollar also faces headwinds against sterling and other major currency pairs, as global risk sentiment shifts in response to diverging central bank trajectories and economic growth concerns.

Currency Performance Snapshot

Current market positioning shows the Australian Dollar among the weaker performers today, particularly against the Japanese Yen. Major currency pairs reflect broad-based US Dollar strength, with AUD declining approximately 0.19% versus USD while registering losses against most other major currency counterparts. The divergence underscores investors’ preference for safe-haven currencies amid macroeconomic uncertainty and mixed central bank signaling.