The AUD/USD faces pressure as markets respond to monetary expectations between the US and Australia

The AUD/USD pair experiences a bearish session on Friday, trading around 0.6680 with a daily decline of 0.23%. This movement reflects a deeper realignment in monetary policy expectations in both economies, where the latest macroeconomic data have significantly altered the outlook for both currencies.

Renewed Strength of the US Dollar Supported by Economic Resilience

The US Dollar finds support in a contradictory but generally resilient economic context. December labor data reveal an economy that maintains momentum despite signs of moderation. Job creation stood at 50,000 new positions, below market consensus, while simultaneously the unemployment rate fell to 4.4%. This mixed performance suggests that companies are being more selective in their hiring, but labor demand remains sufficiently firm.

A particularly relevant indicator is wage growth, which accelerated its pace. Average hourly earnings increased by 0.3% month-over-month and 3.8% year-over-year, demonstrating that pressures on labor costs persist in US markets. This economic outlook has modified expectations regarding the future direction of the Federal Reserve.

Change in the Calculations on the Fed’s Monetary Policy

Investors have adjusted their probabilities regarding rate movements. Most of the market now anticipates that the Fed will hold its stance unchanged during its January meeting, while the chances of an additional cut in March have decreased significantly. This more cautious approach reflects the persistence of inflationary pressures that the US monetary authority continues to monitor.

Consumer confidence adds an additional element to this analysis. The University of Michigan Consumer Sentiment index reached its highest point in several months in January, while inflation expectations over the horizon remain anchored at elevated levels. These factors combined support the position of a US Dollar with favorable fundamentals in the short term.

Australian Under Pressure from Disappointing Inflation and More Moderate Monetary Expectations

In contrast, the Australian Dollar faces headwinds derived from the surprise to the downside in price data. The November Consumer Price Index showed a more pronounced slowdown than expected, with annual inflation decreasing to 3.4%. This reading has completely reconfigured market expectations regarding the trajectory of the Reserve Bank of Australia’s monetary policy.

The immediate consequence has been a reduction in the probabilities of monetary tightening in the short term. According to market assessments, the likelihood of a rate hike in February by the RBA is considered limited at this time. This shift in outlook directly weighs on the relative strength of the Australian Dollar.

Monetary Divergence as a Structural Weakness Factor for AUD/USD

The combination of a more restrictive US monetary policy (or at least a longer-lasting tight cycle) versus an Australian trajectory that is likely to remain accommodative for longer creates an unfavorable differential for AUD/USD. Interest rate differentials between both economies tend to compress, reducing the relative attractiveness of assets denominated in the Australian Dollar.

As long as the market continues to price in persistent vigilance by the US monetary authority regarding inflation risks, and as long as the RBA adopts a more tolerant stance toward moderate growth, the technical and fundamental bias for AUD/USD will likely remain downward.