RBA Rate Expectations and Softer US Data Push AUD to USD Strength as the Aussie Rebounds

The aud to usd exchange rate is staging a comeback, with the pair consolidating near 0.6700 following a mixed session that revealed diverging economic signals between Australia and the United States. Monday’s trading showed the Australian Dollar (AUD) gaining 0.10%, recovering from earlier weakness as investors recalibrated their outlook on monetary policy divergence.

Why Australia’s Rate Outlook is Supporting AUD/USD

The critical driver behind recent AUD strength lies in growing expectations for tighter monetary policy from the Reserve Bank of Australia. With the fourth-quarter Consumer Price Index (CPI) set for release on January 28, markets are closely watching for signs that inflation remains sticky. Should core CPI readings surprise to the upside, the RBA could move forward with a rate hike at its February 3 policy meeting.

RBA Governor Michele Bullock’s recent commentary has fueled this speculation. While she stopped short of signaling an imminent hike, her acknowledgment that the board reviewed scenarios requiring monetary tightening has kept rate hike expectations alive. In the foreign exchange market, the prospect of higher Australian interest rates makes AUD-denominated assets more attractive to international investors, supporting the currency.

Chinese Economic Weakness Complicates the Picture

Yet headwinds persist. China’s economic deceleration continues to weigh on the Australian Dollar. December’s services PMI fell to 52.0 from 52.1 previously, reflecting sector softness. Manufacturing PMI, however, offered a glimmer of hope, inching up to 50.1 from 49.9—suggesting output stabilization rather than contraction.

As Australia’s largest trading partner, China’s economic trajectory remains the primary external constraint for the AUD. Any sustained deterioration in Chinese growth could offset domestic rate hike hopes.

US Manufacturing Contraction Pressures the Greenback

On the American side, the US Dollar faced headwinds despite initial safe-haven demand. The ISM Manufacturing PMI fell to 47.9 in December—marking a third consecutive monthly decline and missing expectations of 48.3. This print signals a deepening contraction in US industrial activity, with production and inventory levels both weakening.

The report exposed cracks in the broader US economy. While components like New Orders showed modest resilience, the overall picture points to a cooling manufacturing base. This data undermined earlier USD strength driven by geopolitical concerns in Latin America.

The Fed Policy Pivot Question

Looking forward, market pricing continues to reflect expectations for two Federal Reserve rate cuts through 2026. However, FOMC minutes from December revealed hesitation among several policymakers, with members favoring a pause in additional cuts if inflation continues its downward trajectory.

The uncertainty surrounding Fed leadership—with Trump potentially nominating a new Chair as Jerome Powell’s tenure ends in May—adds another layer of complexity. A change in Fed personnel could shift the central bank toward a more dovish stance, further pressuring the USD and potentially bolstering the aud to usd pair.

The Bottom Line: The Australian Dollar’s rebound reflects a combination of emerging rate hike expectations at home and US economic softness abroad. The aud to usd rate remains poised between Chinese weakness and Australian monetary policy divergence, making upcoming data releases critical inflection points for the pair’s near-term direction.