Why AUD/USD Struggles Below 0.6600 Despite Australia's Inflation Warnings

USD strength continues to overshadow RBA rate hike expectations, keeping the Australian Dollar under pressure for six consecutive trading days. Australia’s inflation expectations climbed to 4.7% in December, up from November’s 4.5% low, fueling expectations that the Reserve Bank of Australia may tighten policy as early as February. Market pricing shows a 28% probability of a February hike and nearly 41% for March, with August almost fully priced in. Yet despite these hawkish signals, the AUD/USD pair remains trapped below the 0.6600 level, signaling that broader USD strength is overriding regional monetary policy optimism.

American Dollar Finds Footing as Rate Cut Prospects Fade

The US Dollar Index (DXY) is trading around 98.40, buoyed by diminishing expectations for further Federal Reserve rate cuts. Atlanta Fed President Raphael Bostic indicated Tuesday that the December jobs report painted a mixed picture and would not shift the Fed’s outlook. While payroll growth of 64K slightly exceeded forecasts, October employment figures were sharply revised downward, and the jobless rate edged up to 4.6%—the highest since 2021.

Bostic emphasized that multiple surveys point to higher input costs, with firms determined to maintain profit margins through price increases. He warned against premature declarations of victory on inflation, noting that “price pressures are not just coming from tariffs.” The Fed official also projected 2026 GDP growth around 2.5%.

Fed officials remain divided on further easing. The median projection calls for just one rate cut in 2026, while some policymakers see no additional cuts at all. Traders, by contrast, anticipate two reductions next year. The CME FedWatch tool reflects futures pricing a 74.4% probability that the Fed holds rates at January’s meeting, up from approximately 70% one week prior.

Asian Economic Data Underscores Global Slowdown Concerns

China’s retail landscape darkened in November, with sales rising only 1.3% year-over-year, missing the 2.9% forecast and October’s 2.9% gain. Industrial production climbed 4.8% year-over-year, below the 5.0% expected and prior 4.9%. Fixed asset investment disappointed at -2.6% year-to-date, versus the -2.3% consensus, a deterioration from October’s -1.7%.

Australia’s labor market added complexity, with the unemployment rate holding steady at 4.3% in November—below the 4.4% consensus. Employment change, however, swung sharply negative at -21.3K versus October’s revised 41.1K, well below the 20K forecast. Manufacturing activity edged higher with the S&P Global PMI rising to 52.2 from 51.6, but services deteriorated to 51.0 from 52.8, with the composite index falling to 51.1 from 52.6.

Technical Pressure Weighs as Support Levels Fracture

The AUD/USD pair trades below 0.6600 after breaking beneath the ascending channel trend on the daily chart, indicating diminished bullish momentum. The pair has fallen below the nine-day Exponential Moving Average (EMA) at current levels, reflecting weakening short-term price dynamics.

Downside targets now include the psychological 0.6500 level, followed by the six-month low of 0.6414 set on August 21. On the recovery side, resistance emerges at the nine-day EMA around 0.6619. A sustained rebound would need to reclaim the ascending channel and challenge the three-month high of 0.6685, with further upside toward 0.6707 (highest since October 2024) and the upper channel boundary near 0.6760.

For reference, at current levels near 0.6600, USD 2000 would exchange for approximately AUD 3030, reflecting the pair’s weakness relative to stronger USD valuations seen earlier in 2024.

Australian Dollar Weakness Extends Across the Board

The AUD emerged as the session’s weakest performer against the Japanese Yen, with broader currency pairings reflecting modest moves. The Australian Dollar depreciated 0.19% against the US Dollar and 0.12% against the New Zealand Dollar, underscoring its challenge in the current risk environment where greenback strength and Fed policy uncertainty dominate market sentiment.