USD Strength Weighs on Australian Dollar as RBA Rate Hike Bets Mount

The Australian Dollar enters a bear territory against the US Dollar on the back of diverging monetary policy expectations between the Reserve Bank of Australia and the Federal Reserve. Shifting rate cut odds are favoring the greenback, with markets now pricing in a more hawkish RBA stance following uptick in consumer inflation metrics. For context, 345 USD to AUD converts to approximately 525-530 AUD at current levels, reflecting the currency pair’s depreciation pressure.

The weakness in the Australian Dollar has extended into a sixth consecutive day of losses against the US Dollar, as the market reprices expectations around central bank policy trajectories. While inflation gauges strengthen the case for RBA tightening as soon as February, paradoxically, the Aussie remains under pressure as the greenback draws support from a reassessment of Federal Reserve rate-cut prospects.

Fed Rate Cut Expectations Dim, Supporting the US Dollar

The US Dollar Index, tracking the greenback’s performance against six major peers, has held firm around the 98.40 mark, underpinned by cooling expectations for additional Federal Reserve easing. The CME FedWatch tool now prices in a 74.4% probability that the Fed leaves rates unchanged at its January meeting, up from approximately 70% a week prior—a significant shift in market sentiment.

Labor market signals have turned mixed, providing Fed officials with reason for pause. November’s payroll additions reached 64,000, marginally exceeding forecasts, but prior-month revisions painted a grimmer picture. The unemployment rate edged up to 4.6%, the highest level since 2021, suggesting cracks in the employment landscape. Retail sales flatlined month-over-month, signaling that consumer spending momentum is losing traction.

Atlanta Fed President Raphael Bostic weighed in this week with cautionary remarks, suggesting the jobs print was a “mixed picture” that leaves the policy outlook unchanged. More significantly, Bostic flagged persistent inflationary pressures beyond tariff-related shocks, stating that companies remain committed to margin preservation through pricing strategies. This commentary hints at a Fed likely to hold steady rather than rush into additional cuts.

The disconnect between market expectations and Fed guidance has widened. While traders anticipate two rate cuts in 2026, the median Fed official projects only one reduction, with some policymakers seeing no cuts materializing at all.

RBA’s Hawkish Posture Surprisingly Fails to Support the Aussie

Australia’s Consumer Inflation Expectations climbed to 4.7% in December, reversing November’s three-month low of 4.5%. This uptick reinforces the central bank’s resolve to maintain a tightening bias. Commonwealth Bank and National Australia Bank have both adjusted their forecasts, now expecting the RBA to commence rate increases earlier than previously anticipated, driven by stubborn inflation amid constrained economic capacity.

The swaps market has caught onto this shift, pricing in meaningful odds of an RBA hike as early as February, with March probabilities also elevated. On the surface, this should support the Australian Dollar, yet the currency continues to depreciate. The paradox lies in the relative comparison: while the RBA may tighten sooner than expected, the Fed appears equally committed to pausing cuts, negating the Aussie’s natural advantage.

Chinese Data Weakness Adds Regional Headwinds

Complicating the picture for risk sentiment in the Asia-Pacific region are disappointing economic data from China. Retail Sales grew just 1.3% year-over-year in November, missing the 2.9% consensus and falling from October’s 2.9% print. Industrial Production expanded 4.8% YoY, below the 5.0% forecast, though holding firm from prior months.

Fixed Asset Investment deteriorated further, contracting 2.6% year-to-date in November versus the expected -2.3% decline and October’s -1.7%. These soft readings underscore persistent weakness in Chinese aggregate demand, which could suppress appetite for higher-yielding regional assets like the Australian Dollar.

Australian Economic Data: Mixed Signals

Australia’s own economic indicators offered a checkered performance. The Manufacturing PMI inched upward to 52.2 in December from 51.6 previously, suggesting modest expansion in the sector. Services PMI, however, retreated to 51.0 from 52.8, while the Composite PMI slipped to 51.1 from 52.6, hinting at softer momentum in the broader economy.

The unemployment rate held steady at 4.3% in November, coming in below the 4.4% market expectation. However, employment change swung to a -21.3K loss in November from +41.1K gains in October (revised), significantly undershooting the 20K consensus forecast. This deterioration in job creation raises questions about the sustainability of the labor market recovery.

Technical Setup Suggests Further Downside Risk for AUD/USD

From a technical perspective, the AUD/USD pair has decisively broken below the 0.6600 support zone, trading well below this key psychological level on Thursday. The pair has also dropped beneath its nine-day Exponential Moving Average, confirming weakening short-term momentum and a deteriorating bullish structure.

The daily chart reveals the pair trading below an ascending channel that previously defined the bullish trend, signaling a shift in market structure. Should momentum persist, the AUD/USD could descend toward the 0.6500 psychological floor, with a further test of the six-month low at 0.6414 (established on August 21) remaining on the downside roadmap.

A rebound scenario would require the pair to reclaim the nine-day EMA near 0.6619, which could open the door to testing the three-month high at 0.6685. Sustained advances would need to overcome the 0.6707 resistance level, marking the highest point since October 2024. A decisive break would target the upper ascending channel boundary around 0.6760.

The Broader Takeaway

The Australian Dollar faces a structural headwind from USD strength, despite compelling fundamental arguments for RBA tightening. Until the divergence in monetary policy expectations narrows or Chinese economic data stabilizes, the Aussie risks further depreciation. Investors monitoring 345 USD to AUD parity should remain vigilant for technical breaks, as the technical setup continues to favor downside scenarios in the near term.