The Australian Dollar (AUD) extends its decline against the US Dollar (USD) on Wednesday, marking a fifth consecutive session of losses. Despite the bearish price action, downside pressure on AUD/USD may remain limited as markets increasingly factor in the risk of an earlier-than-expected rate hike by the Reserve Bank of Australia (RBA), potentially as soon as February.
Major domestic banks, including Commonwealth Bank of Australia and National Australia Bank, have shifted their outlook toward earlier policy tightening, citing persistent inflation pressures in an economy operating near capacity. The revised forecasts follow the RBA’s hawkish decision to keep rates unchanged at its final policy meeting of 2025. Interest-rate swaps now imply a roughly 28% probability of a February hike, rising to nearly 41% in March, with an August move almost fully priced in.
Still, the Aussie remains under pressure following mixed domestic activity data. Australia’s preliminary S&P Global Manufacturing PMI improved to 52.2 in December from 51.6, signaling modest expansion. In contrast, the Services PMI slipped to 51.0 from 52.8, while the Composite PMI eased to 51.1 from 52.6, pointing to a loss of momentum across the broader economy.
US Dollar struggles despite fading Fed rate cut expectations
The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is trading sideways around the 98.20 area at the time of writing. The USD is finding some support as recent US data failed to significantly strengthen the case for further Federal Reserve rate cuts.
November’s US labor market report showed Nonfarm Payrolls rising by 64,000, modestly above expectations. However, a sharp downward revision to October employment and an increase in the Unemployment Rate to 4.6%, the highest level since 2021, underscored signs of gradual cooling. Meanwhile, US retail sales were flat on a monthly basis, reinforcing concerns that consumer demand is losing momentum.
Fed officials remain divided on the policy outlook for next year. While the median projection points to just one rate cut in 2026, some policymakers see no need for additional easing. In contrast, market pricing continues to anticipate two cuts. According to the CME FedWatch tool, Fed funds futures are now pricing in a 74.4% probability of a rate hold at the January meeting, up from around 70% a week earlier.
China data adds to headwinds for the Aussie
China-related developments continue to weigh on the Australian Dollar. Data from China’s National Bureau of Statistics showed that Retail Sales rose just 1.3% year-on-year in November, well below expectations of 2.9% and the prior month’s reading. Industrial Production increased 4.8% over the same period, slightly missing forecasts and easing from October’s pace. Fixed Asset Investment declined 2.6% year-to-date in November, undershooting expectations and deteriorating from the previous month.
On the domestic labor front, data from the Australian Bureau of Statistics showed the Unemployment Rate holding steady at 4.3% in November, slightly better than market expectations. However, Employment Change disappointed, with a decline of 21.3K jobs following a revised gain of 41.1K in October, compared to forecasts for a 20K increase.
AUD/USD technical outlook
AUD/USD is trading near the 0.6630 level on Wednesday. From a technical perspective, the daily chart shows the pair still confined within an ascending channel, suggesting that the broader trend remains constructive. However, price action is hovering around the nine-day Exponential Moving Average (EMA), indicating neutral short-term momentum.
On the downside, the pair could test the lower boundary of the ascending channel near 0.6620. A decisive break below this area would expose deeper losses toward the six-month low at 0.6414, recorded on August 21. On the upside, immediate resistance is seen at the three-month high of 0.6685, followed by 0.6707, the highest level since October 2024. A sustained move higher could open the door for a test of the upper boundary of the ascending channel around 0.6740.
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