AUD Weakens Further While Rate Hike Bets Heat Up—What's Next for the Currency and Gold Price

Technical Breakdown: AUD/USD Testing Critical Support Levels

The Australian Dollar finds itself under sustained selling pressure, with AUD/USD trading below the crucial 0.6600 support zone on Thursday—marking the sixth consecutive day of losses against the US Dollar. The technical picture reveals a pair that has slipped beneath the nine-day Exponential Moving Average (EMA), signaling deteriorating short-term momentum and a breakdown from the ascending channel that previously supported bullish sentiment.

The downside trajectory suggests further weakness could emerge toward the psychological 0.6500 level, with a six-month low of 0.6414 (recorded on August 21) positioned as the next capitulation target. On a recovery, resistance lies at the nine-day EMA around 0.6619, with a reclaim of the ascending channel boundary opening the door to the three-month high of 0.6685 and the recent peak of 0.6707 (highest since October 2024). Breaking above the upper channel would propel AUD toward 0.6760.

As safe-haven flows intensify during uncertain market conditions, investors are watching how AUD moves correlate with gold price trends—both traditionally benefiting from risk-off sentiment, though AUD has been lagging in this cycle.

Inflation Expectations Rise, But AUD Continues to Disappoint

Despite Consumer Inflation Expectations jumping to 4.7% in December from November’s three-month trough of 4.5%, the Australian Dollar has failed to capitalize on the hawkish data point. This persistent inflation signal would normally bolster expectations for Reserve Bank of Australia tightening, yet the currency continues to deteriorate.

Major Australian banks are now positioning for an aggressive RBA pivot. Commonwealth Bank of Australia and National Australia Bank have revised their forecasts to anticipate rate hikes beginning as early as February 2025—sooner than their prior estimates. This recalibration follows the RBA’s decidedly hawkish stance during its final rate decision of 2025 last week, when officials held the line amid stubborn price pressures in a capacity-constrained economy.

Derivatives markets are pricing a 28% probability of a February rate lift, climbing to nearly 41% for March, with August futures nearly fully priced for tightening. In theory, these forward-rate expectations should anchor AUD strength, yet the currency’s persistent weakness suggests other forces are at play—primarily the powerful headwind from US Dollar appreciation.

US Dollar Strengthens as Fed Rate Cut Expectations Fade

The US Dollar Index (DXY), which benchmarks the greenback against six major currencies, remains supported near 98.40, buoyed by declining odds of additional Federal Reserve rate reductions. Market participants have sharply recalibrated their 2026 rate-cut expectations following mixed employment data and hawkish commentary from Fed officials.

November’s US payroll report delivered 64K in job creation—marginally above consensus but masked by a downward October revision. The unemployment rate ticked higher to 4.6%, the highest level since 2021, pointing to a cooling labor market. Retail sales remained flat month-over-month, reinforcing evidence that consumer spending momentum is faltering. These crosscurrents have left Fed officials divided on whether monetary easing is warranted.

Atlanta Federal Reserve President Raphael Bostic signaled a preference for holding rates steady, describing the jobs report as “a mixed picture” that doesn’t alter the policy outlook. In a Tuesday blog post, Bostic emphasized that multiple surveys indicate rising input costs, with businesses determined to defend margins through price increases. He cautioned against premature victory declarations on inflation: “Price pressures are not just coming from tariffs. The Fed should not be hasty to declare victory.” With a 2026 GDP forecast around 2.5%, Bostic’s remarks reflect the central bank’s ongoing tug-of-war between growth and price stability concerns.

The Fed median projection now pencils in just one rate cut for 2026, though some officials envision no cuts at all. This contrasts with trader expectations of two cuts, highlighting the dovish sentiment embedded in derivatives markets. The CME FedWatch tool currently prices a 74.4% probability of a rate hold at the January Fed meeting, up from approximately 70% one week prior.

Regional Data Paints a Mixed Picture

Australia’s Manufacturing PMI edged higher to 52.2 in December from 51.6 previously, signaling modest expansion in factory activity. However, Services PMI deteriorated to 51.0 from 52.8, while the Composite reading fell to 51.1 from 52.6, suggesting underlying economic momentum remains fragile. November unemployment held steady at 4.3%, below the 4.4% consensus, yet employment fell by 21.3K during the month—a sharp reversal from October’s revised 41.1K gain.

China’s data, meanwhile, disappointed on multiple fronts. Retail Sales expanded just 1.3% year-over-year in November, well short of the 2.9% consensus and October’s 2.9% print. Industrial Production came in at 4.8% YoY, below the 5.0% forecast, though slightly ahead of the prior 4.9% result. Most concerning, Fixed Asset Investment collapsed to -2.6% year-to-date YoY, missing the -2.3% expectation and deteriorating from October’s -1.7%.

Currency Strength and the Gold Price Connection

The Australian Dollar’s struggle against the greenback mirrors broader risk sentiment in markets. When AUD weakens significantly, investors often reassess allocations between currency-hedged and unhedged commodity exposure—particularly relevant for gold price considerations. While gold typically appreciates during USD strength periods paradoxically through increased emerging-market demand, the relationship between AUD weakness and gold price dynamics remains nuanced, with both reflecting underlying shifts in risk appetite and monetary policy divergence between central banks.

The divergence between RBA rate-hike expectations and AUD weakness underscores the reality that technical factors and dollar strength can override domestic policy signals in the near term.