Australian Dollar Falls Further as Market Doubts RBA's February Pivot Despite Rising Inflation Signals

The Australian Dollar continues to weaken against its US counterpart, marking a sixth consecutive day of declines as traders reassess expectations around Reserve Bank of Australia rate action. Inflation expectations in Australia climbed to 4.7% in December, a rebound from November’s 4.5%, yet failed to arrest the Aussie’s downward momentum. Meanwhile, the US Dollar maintains strength as bets on further Federal Reserve easing fade away.

The AUD/USD pair is trading well below the 0.6600 psychological level on Thursday, reflecting a broader downtrend that has proven resilient despite hawkish signals from Australia’s central bank. While the uptick in Consumer Inflation Expectations should theoretically support the Australian Dollar—signaling a firmer case for monetary tightening—the currency has instead surrendered ground for six straight sessions. This disconnect highlights how currency markets are pricing in factors beyond just domestic inflation dynamics.

What the Inflation Numbers Mean for the RBA

Australia’s Consumer Inflation Expectations surged to 4.7% in December from a three-month low of 4.5% in November. This resurgence underscores persistent price pressures in an economy constrained by limited spare capacity. Commonwealth Bank of Australia and National Australia Bank have both shifted their forecasts to reflect an earlier start to RBA tightening cycles than they previously anticipated, citing stubborn inflation as the culprit.

The financial markets are beginning to price in this shift. Derivatives markets are currently pricing a 28% probability of an RBA rate hike by February, climbing to nearly 41% odds for March, with August almost entirely priced in for further moves. The central bank’s hawkish stance during its final 2025 meeting last week lent credibility to these expectations, yet the Australian Dollar has still retreated rather than rallied.

US Dollar Finds Its Footing as Rate Cut Hopes Crumble

The US Dollar Index (DXY), which tracks the greenback against six major trading partners, is holding steady near 98.40. The USD’s resilience stems from diminishing conviction that the Federal Reserve will deliver multiple rate cuts in the year ahead.

The US November employment report painted a mixed picture. Payroll growth came in at 64K, barely exceeding forecasts, while October figures underwent a sharp downward revision. The unemployment rate ticked up to 4.6%, its highest level since 2021, pointing toward gradual labor market softening. Retail sales remained flat month-on-month, adding weight to concerns that consumer spending momentum is deteriorating.

Fed officials sent conflicting signals about 2026 monetary policy. Atlanta Fed President Raphael Bostic commented in a Tuesday blog post that the employment figures did not alter the Fed’s outlook and that he would favor leaving rates on hold. He emphasized that multiple surveys indicate rising input costs, with firms determined to protect margins by raising prices. “Price pressures extend beyond tariffs alone,” Bostic cautioned, noting he projects 2026 GDP growth around 2.5%. Fed funds futures, as tracked by the CME FedWatch tool, are now pricing a 74.4% probability of unchanged rates at the January policy meeting, up from roughly 70% one week prior.

The median Fed official’s projection calls for just one rate cut across 2026, though some policymakers see none forthcoming. Traders, by contrast, are banking on two cuts during the same period—a sizable gap suggesting elevated uncertainty.

Mixed Signals From China’s Economic Data

China’s growth engine showed signs of faltering in November. Retail Sales expanded just 1.3% year-over-year, falling short of the 2.9% consensus and October’s 2.9% print. Industrial Production rose 4.8% annually, lagging the 5.0% forecast and the prior month’s 4.9%.

Fixed Asset Investment declined 2.6% year-to-date in November, missing expectations for a -2.3% reading, down from October’s -1.7% figure. These softer numbers paint a picture of a Chinese economy that is losing steam, which can weigh on commodity-linked currencies like the Australian Dollar.

Australian Employment and PMI Data Paint a Softer Picture

Australia’s preliminary S&P Global Manufacturing PMI edged up to 52.2 in December from 51.6 the prior month—a modest improvement. However, the Services PMI slipped to 51.0 from 52.8, and the Composite PMI fell to 51.1 from 52.6. These readings suggest that momentum in the Australian economy remains tepid.

The Australian Bureau of Statistics reported that the Unemployment Rate held steady at 4.3% in November, undershooting the 4.4% market consensus. Yet Employment Change swung dramatically to -21.3K in November from 41.1K in October (revised upward from 42.2K’s prior estimate), versus the 20K forecast. This sharp reversal in hiring raises questions about the durability of the Australian labor market’s earlier strength.

Technical Analysis: Support and Resistance Zones

The AUD/USD pair is now entrenched below the 0.6600 level after slipping beneath the ascending channel trend that had supported a bullish narrative. Trading below the nine-day Exponential Moving Average (EMA) at current levels suggests short-term momentum remains decidedly negative.

Should weakness extend, the pair could drift toward the psychological floor of 0.6500, followed by the six-month low of 0.6414 established on August 21. To restore bullish credibility, the pair would need to reclaim the nine-day EMA near 0.6619. A sustained move back above that level would put the three-month high of 0.6685 in play, with 0.6707 (the highest level since October 2024) and the upper ascending channel boundary around 0.6760 presenting further upside targets.

Currency Performance Snapshot

The Australian Dollar registered the weakest performance among major currency pairs today, particularly against the Japanese Yen. The weakness reflects both the downtrend in the AUD/USD pair and shifting risk sentiment across global markets. Traders holding exposure to the Aussie are contending with a confluence of headwinds: softer Chinese economic data, a cautious Fed that is unlikely to ease aggressively, and domestic labor market cracks despite rising inflation expectations.