Rising Inflation Expectations Signal Tighter RBA Policy, Yet AUD/USD Extends Downtrend

Australian Consumer Inflation Expectations Edge Higher While Market Prices in February Rate Hike Odds

The Australian Dollar continues its losing streak against its US counterpart, sliding for the sixth consecutive session despite signals pointing toward imminent tightening from the Reserve Bank of Australia. The contradiction reflects a fundamental shift in market dynamics—while domestic inflation pressures are rising, the greenback’s strength is proving to be the more dominant force.

Inflation Expectations Climb as RBA Tightening Talk Intensifies

Australia’s Consumer Inflation Expectations climbed to 4.7% in December, representing a notable recovery from November’s three-month low of 4.5%. This uptick bolsters the case for the RBA to begin raising interest rates sooner rather than later, with major Australian financial institutions now forecasting an earlier policy shift.

Commonwealth Bank of Australia and National Australia Bank have revised their outlooks, now anticipating the central bank will commence tightening cycles ahead of previous estimates. Their recalibration follows the RBA’s hawkish stance during its final policy meeting of 2025. Market pricing reflects this expectation clearly: swap markets are assigning a 28% probability to a February hike, nearly 41% for March, with August pricing in rate increases as virtually assured.

The economic backdrop supporting these expectations is compelling. Australia faces a capacity-constrained economy where inflation remains stubbornly elevated, creating structural pressure on policymakers to act. Yet despite these pro-AUD fundamentals, the Australian Dollar has struggled to capitalize.

US Dollar Gains Ground as Fed Easing Bets Fade

The US Dollar Index (DXY), measuring the greenback’s performance against six major trading partners, is anchored near 98.40, benefiting from diminishing expectations of further Federal Reserve rate cuts.

Recent US labor market data painted a mixed picture. November payrolls expanded by 64,000—marginally better than forecasts—though October figures underwent significant downward revision. Simultaneously, the unemployment rate ticked up to 4.6%, marking the highest level since 2021, suggesting a labor market cooling gradually beneath the surface.

Consumer spending showed equal signs of fatigue, with retail sales recording flat growth month-over-month, reinforcing emerging signals that demand momentum is waning.

Atlanta Federal Reserve President Raphael Bostic acknowledged this complexity in a recent blog post, describing the jobs report as presenting a “mixed picture” that does not materially alter the Fed’s outlook. Bostic expressed a preference for maintaining rates at the central bank’s recent meeting. He emphasized that “multiple surveys” indicate elevated input costs across firms, which are defending profit margins through price increases. Importantly, Bostic cautioned against premature optimism on inflation: “Price pressures extend beyond tariff effects alone, and the Fed should not declare victory hastily,” while projecting 2026 GDP growth at approximately 2.5%.

Fed policymakers remain divided on monetary policy trajectory for 2026. The median official penciled in just one rate reduction, while some members advocate for no cuts whatsoever. This contrasts with trader expectations, which currently anticipate two reductions next year. CME FedWatch futures pricing reveals a 74.4% probability of unchanged rates at January’s Fed meeting, up from roughly 70% one week prior.

Asian Economic Softness Adds Context

China’s economic data offered additional perspective on global conditions. Retail Sales expanded 1.3% year-over-year in November against a 2.9% expectation and prior 2.9% reading—a significant disappointment. Industrial Production managed 4.8% year-over-year growth, marginally below the 5.0% forecast and previous 4.9% reading.

Fixed Asset Investment deteriorated to -2.6% year-to-date on a year-over-year basis, missing the anticipated -2.3% and following October’s -1.7%. These figures paint a picture of sustained economic slowdown in China, the region’s largest economy.

Australia’s own activity indicators presented nuanced signals. The preliminary S&P Global Manufacturing PMI inched upward to 52.2 in December from 51.6 previously. However, the Services PMI declined to 51.0 from 52.8, while the Composite PMI fell to 51.1 from 52.6—suggesting manufacturing resilience offset by service sector weakness.

Employment figures published by the Australian Bureau of Statistics revealed the unemployment rate holding steady at 4.3% in November, below the consensus forecast of 4.4%. However, employment rolls contracted by 21,300 in November following a revised gain of 41,100 in October, diverging notably from the forecasted 20,000 increase.

Technical Picture Deteriorates Below Confluence Support

On the daily chart, AUD/USD trades below the 0.6600 level, which represents a confluence support zone. The pair’s position beneath the ascending channel trend suggests weakening bullish momentum. Trading below the nine-day Exponential Moving Average further confirms deteriorating short-term price dynamics.

Should selling pressure persist, the AUD/USD pair could test the psychological 0.6500 barrier next, with the six-month low of 0.6414 (established on August 21) marking the next significant level of interest.

Conversely, a rebound would first target the nine-day EMA at 0.6619. Break above this level would restore the ascending channel framework and potentially propel the pair toward the three-month high of 0.6685, followed by 0.6707 (the best level since October 2024). Sustained upside momentum would then challenge the upper channel boundary in the 0.6760 vicinity.

Currency Performance Snapshot

The Australian Dollar emerged as the weakest performer among major currencies, particularly vulnerable against the Japanese Yen. Against the US Dollar specifically, AUD depreciated 0.19% during the trading session, while gains materialized only versus the New Zealand Dollar (0.12%) and Swiss Franc, with marginal appreciation against those alternatives.