AUD/USD Extends Weakness: RBA Rate Hike Bets Clash with Technical Breakdown Below 0.6600

The Australian Dollar continues its downward trajectory against its US counterpart, marking the sixth consecutive day of losses on Thursday. Despite mounting expectations for an early February rate hike from the Reserve Bank of Australia, the AUD/USD pair struggles to maintain ground above the critical 0.6600 level, signaling a disconnect between hawkish monetary policy signals and near-term price action.

Technical Breakdown Overrides RBA Hawkish Signals

The AUD/USD pair is currently trading below 0.6600, a confluence support zone that has failed to provide adequate cushion for the Australian Dollar. The daily chart reveals the pair has slipped beneath the ascending channel trend line, indicating a deterioration in bullish momentum. Most significantly, the currency is now trading under the nine-day Exponential Moving Average (EMA) at 0.6619, suggesting weakening short-term price dynamics.

If selling pressure intensifies, the pair could accelerate toward the psychological level of 0.6500, followed by the six-month low of 0.6414 recorded on August 21. On the recovery side, a move back above the nine-day EMA at 0.6619 would be needed to revive bullish interest. Success above this level could pave the way toward the three-month high of 0.6685 and further resistance at 0.6707 (the highest since October 2024). A decisive break above these levels would target the upper boundary of the ascending channel near 0.6760.

RBA Hawkishness Gains Traction Amid Sticky Inflation

Australia’s Consumer Inflation Expectations climbed to 4.7% in December, up from November’s three-month low of 4.5%, reinforcing expectations that the Reserve Bank of Australia may accelerate its policy normalization. Major Australian banks, including Commonwealth Bank and National Australia Bank, have revised their forecasts to anticipate an RBA rate hike potentially as early as February, a move brought forward from earlier projections.

The shift reflects persistent inflationary pressures within a capacity-constrained Australian economy. Swap markets are currently pricing a 28% probability of a February hike, nearly 41% odds for March, with August almost fully priced in for tightening. This growing consensus among policymakers and market participants suggests the RBA is unlikely to remain on hold indefinitely, particularly if inflation expectations remain elevated.

The central bank’s hawkish hold on rates at its final 2025 meeting last week solidified this perception, encouraging some market participants to consider potential support for the Australian Dollar from investors taking a cautious stance ahead of major economic announcements.

US Dollar Steadies as Fed Rate Cut Bets Fade

The US Dollar Index (DXY), which tracks the greenback’s performance against six major currencies, remains anchored around 98.40, supported by diminishing expectations for additional rate cuts from the Federal Reserve. Recent labor market data has painted a mixed picture that has tempered aggressive easing bets among traders and policymakers alike.

November’s US payroll growth came in at 64,000, slightly exceeding forecasts but accompanied by sharp downward revisions to October figures. The unemployment rate ticked up to 4.6%, reaching its highest level since 2021, signaling gradual labor market cooling. Meanwhile, retail sales remained flat month-over-month, indicating that consumer demand momentum may be waning.

Atlanta Federal Reserve President Raphael Bostic characterized the jobs report as “mixed” and stated it does not warrant a change to the Fed’s current outlook. Bostic emphasized that he would prefer rates remain unchanged at the latest policy meeting. He cautioned that multiple surveys indicate elevated input costs persist, with firms determined to maintain profit margins through price increases. Bostic warned against hasty declarations of victory on inflation, noting that price pressures extend beyond tariff-related factors alone. His GDP forecast for 2026 sits around 2.5%.

Fed officials remain split on the need for additional monetary easing in 2026. The median Fed projection includes just one rate cut for the year, though some policymakers envision no further reductions. Meanwhile, traders are pricing two cuts for 2026, creating tension between official guidance and market expectations.

The CME FedWatch tool shows futures markets are assigning a 74.4% probability to a hold in Fed funds rates at the January meeting, up from approximately 70% a week prior. This rising conviction that rates will remain steady underscores the USD’s near-term support.

Regional Economic Data Paints Mixed Picture

Australian manufacturing activity showed modest improvement, with the preliminary S&P Global Manufacturing PMI rising to 52.2 in December from 51.6 in the prior month. However, the Services PMI retreated to 51.0 from 52.8, while the Composite PMI fell to 51.1 from 52.6, suggesting mixed momentum across the Australian economy.

The Australian Bureau of Statistics reported that the unemployment rate held steady at 4.3% in November, coming in below the consensus forecast of 4.4%. However, employment dynamics deteriorated, with Australian Employment Change showing a decline of 21,300 in November compared to a revised gain of 41,100 in October. This represented a significant miss against the 20,000 projected increase, raising concerns about labor market resilience.

Across the Tasman, China’s economic data continued to disappoint. Retail Sales rose just 1.3% year-over-year in November against expectations of 2.9% and October’s actual reading of 2.9%. Industrial Production increased 4.8% year-over-year, missing the 5.0% forecast. Fixed Asset Investment declined 2.6% year-to-date year-over-year, undershooting the expected -2.3% figure and marking a deterioration from October’s -1.7%.

AUD Weakness Against Major Peers

The Australian Dollar weakened notably against most major currencies on Thursday. Against the Japanese Yen, the AUD posted its largest decline, reflecting broader risk sentiment shifts. The Australian Dollar declined 0.19% against the US Dollar, 0.07% versus the Euro, and 0.05% relative to Sterling. The only exception was a modest 0.12% gain against the New Zealand Dollar, as the NZD itself faced broader weakness on the day.

The currency performance matrix reveals that the Australian Dollar was the weakest performer among major currencies, reinforcing the technical breakdown evident in the AUD/USD pair and suggesting broader positioning shifts among traders.

The Road Ahead for AUD/USD

The Australian Dollar remains caught between competing forces: a hawkish Reserve Bank of Australia narrative that should theoretically support the currency, and technical weakness that continues to dominate near-term price action. The failure to hold above 0.6600 suggests that selling momentum may persist in the near term, particularly if the US Dollar maintains support from fading Fed rate cut expectations.

For the Australian Dollar to stabilize, price action must recapture the nine-day EMA and break back above 0.6600. Only a convincing move back toward the three-month highs would signal that the RBA’s hawkish pivot has finally gained traction with currency investors. Until then, traders should monitor the key downside targets at 0.6500 and the six-month low of 0.6414, which could see accelerated selling if breached decisively.