Why the Australian Dollar Keeps Sliding: Market Repricing Between RBA Tightening and USD Strength

The Australian Dollar (AUD) faces mounting pressure as it extends its losing streak to six consecutive trading days against the US Dollar (USD), with the AUD/USD pair slipping below the critical 0.6600 support zone. While inflation expectations climbing to 4.7% in December—up from November’s 4.5%—should theoretically support the currency, the reality tells a different story. Investors are caught between RBA rate hike bets and a resurgent US Dollar, creating a complex dynamic that’s weighing heavily on the Aussie.

The USD’s Hidden Strength: Fed Caution Outweighs RBA Hawkishness

The US Dollar Index (DXY) continues hovering around 98.40, drawing support from a crucial shift in Fed expectations. While markets initially priced aggressive rate cuts, the latest economic data has fundamentally altered that narrative. The November US jobs report delivered a mixed picture—payroll growth of 64K came in slightly ahead of forecasts, yet October figures were significantly revised lower, and unemployment climbed to 4.6%, marking the highest level since 2021.

This labor market softening has prompted Fed officials to reassess their cutting trajectory. The median Fed policymaker now projects just one rate reduction in 2026, with some officials seeing no cuts at all. CME FedWatch tools currently price a 74.4% probability of unchanged rates at January’s meeting, reflecting growing caution among traders who previously anticipated two cuts this year.

Atlanta Fed President Raphael Bostic reinforced this hawkish tone, noting that while job growth shows signs of cooling, price pressures remain stubborn. His warning that “the Fed should not be hasty to declare victory” underscores why the USD maintains its footing despite dovish expectations fading.

Australia’s Inflation-RBA Puzzle

Australia’s Consumer Inflation Expectations surged to 4.7% in December, a sharp reversal from the three-month low of 4.5% the previous month. This development has convinced major financial institutions—Commonwealth Bank of Australia and National Australia Bank—to revise their RBA rate hike timeline forward, expecting tightening as soon as February.

The Reserve Bank of Australia’s hawkish stance at its final 2024 meeting amplified these signals. Swap markets now price a 28% probability of a February rate hike, climbing to nearly 41% for March. Yet this seemingly bullish development for the AUD has failed to reverse the currency’s slide, suggesting that market participants are more focused on the relative attractiveness between the two central banks’ paths rather than absolute rate expectations.

Technical Breakdown: Where AUD/USD Could Head

The AUD/USD pair’s technical picture has deteriorated significantly. Trading below both the nine-day Exponential Moving Average (EMA) at 0.6619 and the broader ascending channel, the pair signals weakening momentum. The psychological 0.6600 level that recently broke has become a critical marker—break below here, and the next target emerges at 0.6500, with the six-month low of 0.6414 (from August 21) looming as a potential capitulation zone.

On the recovery side, reclaiming the nine-day EMA would be a first step toward reviving bullish sentiment. A successful retest could pave the way toward the three-month high of 0.6685, followed by 0.6707. Breaking above 0.6760—the upper boundary of the ascending channel—would represent a significant structural shift.

Cross-Market Context: China and Australia’s Economic Backdrop

Recent data from China, Australia’s largest trading partner, adds another layer of complexity. Chinese retail sales stumbled to 1.3% year-over-year growth in November, missing the 2.9% forecast, while industrial production managed 4.8% but fell short of the 5.0% expectation. Fixed asset investment disappointed at -2.6% YTD against a -2.3% forecast, suggesting economic momentum is decelerating.

On the domestic front, Australia’s manufacturing PMI inched up to 52.2 in December, but the services sector retreated to 51.0 from 52.8, with the composite falling to 51.1. The employment picture remains fragile, with the unemployment rate holding steady at 4.3% in November, though employment change disappointed at -21.3K versus consensus expectations of +20K.

This mixed economic backdrop means the AUD’s rally story hinges less on Australian fundamentals and more on whether the RBA actually delivers rate hikes before the Fed does—a wager that currently appears to be losing ground to USD strength.