US Dollar Strength Pressures Australian Currency Despite Rate Hike Prospects

The Australian Dollar stumbles for its sixth consecutive session as the Federal Reserve’s cautious stance dominates market sentiment. While inflation expectations in Australia climbed to 4.7% in December, signaling potential tightening measures from the Reserve Bank of Australia, the currency finds itself trapped under persistent selling pressure.

Federal Reserve Uncertainty Weighs Heavily on Global Risk Assets

The US Dollar Index (DXY) maintains resilience around the 98.40 level, drawing strength from shifting expectations about the Federal Reserve’s future course. Market participants are rapidly repricing their assumptions regarding additional rate cuts in 2026, a dramatic reversal from earlier year-end expectations.

The mixed signals from the US labor market have complicated the Fed’s narrative. November’s employment report revealed 64,000 payroll additions—marginally above forecasts—though October’s data underwent substantial downward revision. The unemployment rate ticked up to 4.6%, marking its highest level since 2021. Simultaneously, retail sales remained flat, presenting a picture of a consumer slowly losing purchasing momentum.

Federal Reserve officials remain divided on their policy direction. The median policymaker projection shows only a single rate cut anticipated for 2026, with some hawks opposing further reductions altogether. Traders, meanwhile, still anticipate two cuts. This divergence between officials and market participants creates uncertainty that typically benefits the dollar.

Atlanta Federal Reserve President Raphael Bostic offered his perspective this week, characterizing the jobs report as ambiguous and noting that multiple business surveys indicate elevated input costs alongside determination to preserve profit margins through price increases. “Price pressures transcend tariff effects alone,” Bostic cautioned, highlighting the Fed’s hesitation to declare victory over inflation prematurely. Current pricing via CME FedWatch futures places a 74.4% probability of unchanged rates at the January meeting, up from approximately 70% one week prior.

Australian Inflation Expectations Rise, Yet Currency Struggles

Australia’s Consumer Inflation Expectations rose to 4.7% in December, climbing from November’s three-month low of 4.5%. This uptick reinforces the case for Reserve Bank of Australia action. Commonwealth Bank of Australia and National Australia Bank have both recently revised their forecasts, now expecting the RBA to commence tightening sooner than previously anticipated. The central bank’s aggressive stance at its December meeting crystallized these expectations, with swap markets currently assigning a 28% probability to a February rate increase and nearly 41% for March.

Australia’s manufacturing sector showed marginal expansion, with the S&P Global PMI advancing to 52.2 in December from 51.6 previously. However, services activity retreated to 51.0 from 52.8, pulling the composite gauge down to 51.1 from 52.6. Employment conditions remained stable in November, with the unemployment rate holding steady at 4.3%, outperforming the 4.4% consensus estimate. Employment change, however, disappointed, registering -21.3K versus the expected 20K addition.

Technical Framework: AUD/USD Below Key Support

The AUD/USD exchange rate trades beneath 0.6600 on Thursday, having slipped below its nine-day Exponential Moving Average and exited the ascending channel pattern that previously underpinned bullish positioning. This technical deterioration signals weakening short-term momentum.

Downside targets merit attention: the psychological threshold of 0.6500 looms first, followed by the six-month nadir of 0.6414 established on August 21. Conversely, recovery would need to reclaim the nine-day EMA at 0.6619. Should bullish momentum reassert, the pair could test the three-month peak of 0.6685 and subsequently the October 2024 high near 0.6707. A sustained push higher would challenge the upper ascending channel boundary in the 0.6760 zone.

Cross-Currency Performance and Market Internals

The Australian Dollar registered its weakest performance against the Japanese Yen within Thursday’s session, reflecting broader risk sentiment shifts. Currency strength against the pound sterling and other majors remained constrained, consistent with the broader weakness pattern observed throughout the week. The heat map of major currency pairs illustrates these relative movements clearly, with the Australian Dollar positioned as a laggard across most pairings.