On Wednesday, the Australian dollar continued its persistent slide versus the greenback for the fifth straight session. AUD/USD: Dismal Australian data hurt the Aussie. The AUD/USD pair is seen near 0.6630 at press time, with a couple of bearish setups eyeing further weakness this Wednesday, supported by a positive US Dollar and diminishing expectations of the immediate need for US rate cuts. The downside seems somewhat capped, however, as markets are waking up to the possibility of the RBA lifting rates earlier than expected.
RBA Rate Hike Expectations Offset Weak Domestic Data
Although the Australian Dollar is under pressure, expectations of a tighter monetary policy in Australia are offering some support. Commonwealth Bank of Australia and National Australia Bank now expect the RBA to begin raising rates sooner, possibly as early as February. These expectations follow the RBA’s hawkish decision to keep rates unchanged at its final 2025 meeting.
Market pricing reflects this shift clearly. Interest rate swaps show a 28% chance of a February hike, rising to nearly 41% in March, while an August increase is almost fully priced in. However, Australian data in recent times has been more mixed. In December, the purchasing managers’ index for manufacturing ticked up to 52.2 from 51.6, indicating modest expansion. But the Services PMI decreased to 51.0 from 52.8, and the Composite PMI dropped to 51.1 from 52.6.. Furthermore, Employment change, which was down by 21.3K in November, remains solid, while the Unemployment rate of 4.3% is in line with expectations and better than anticipated.
USD to be continued support as Fed hints at caution
The US Dollar Index is also remaining close to 98.20 as expectations of a sharp Fed rate cut are pared a bit down the line. US payroll increased by 64k in November, above the forecast, though earlier numbers have been revised downward. Unemployment also rose to 4.6 per cent, the highest rate since 2021, and retail sales were flat.
Nevertheless, Fed officials remain divided. The median outlook suggests only one rate cut in 2026, although traders still expect two cuts next year. CME FedWatch data shows a 74.4% probability that rates will remain unchanged in January. Together, these factors continue to keep the US Dollar firm, limiting any near-term recovery in the Australian Dollar.
