Australian Dollar Softens as Markets Reassess RBA and Fed Paths

The Australian dollar declined on Wednesday, with AUD/USD trading close to 0.6630. Uncertainty about the Federal Reserve’s (Fed) next moves has helped the US dollar. Although the pair is still in a longer-term uptrend, short-term momentum has eased, and prices are near the nine-day exponential moving average (EMA). Concerns that the Reserve Bank of Australia (RBA) could raise interest rates earlier than expected are helping the Aussie dollar^[1][2]. Commonwealth Bank of Australia^[3] and National Australia Bank now predict rate hikes as soon as February or March^[4], pointing to ongoing inflation and capacity limits after the RBA’s strong position at its last 2025 meeting. Market data supports this view, with swaps showing a higher chance of a rate increase in the first quarter of 2026. Recent data from the Australian Bureau of Statistics shows a mixed economy. The unemployment rate stayed at 4.3% in November^[5], which was better than expected, but the number of people employed fell by 21,300^[6]. This means the job market is slowing down but still holding up. In the US, the dollar strengthened on mixed economic data, which did not revive expectations for significant Fed rate cuts^[7]. November payrolls grew only a little; earlier numbers were revised down a lot, and the unemployment rate went up to 4.6%, the highest since 2021^[8]. Atlanta Fed President Raphael Bostic called the data “mixed” and warned against thinking inflation is under control^[9], showing that opinions differ within the Fed. CME FedWatch shows a 74% chance^[10] that the Fed will keep rates the same at its January meeting. This uncertainty about policy is helping the dollar stay steady for now. The AUD/USD exchange rate remains delicately balanced near 0.6630, with RBA tightening risks limiting downside while Fed policy uncertainty keeps the pair range-bound in the near term.

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Euro Holds Steady as ECB Stance Offsets Firmer US Dollar

EUR/USD moved down to around 1.1730 early Wednesday in Europe, as stronger US dollar demand and weaker euro-area data put pressure on the pair. Even with this drop, the pair still looks technically strong, holding above the 100-day EMA. Ongoing expectations that the European Central Bank (ECB) will keep its policy unchanged at this week’s meeting are also providing support^{[11] [12]}. Markets are widely pricing the ECB to leave key rates steady on Thursday for the fourth meeting in a row, with the deposit rate at 2%^[13]. While policy is likely to stay unchanged, recent euro-area flash PMI data^[14] show private-sector growth is slowing, which could limit gains for EUR/USD. The HCOB flash Composite PMI for the euro area dropped to 51.9 in December, the lowest in three months. Manufacturing fell below 50, and services growth slowed more than expected. These weaker numbers point to softer demand, even though activity is still growing slightly^[15]. In the US, new labor data gave a more detailed view of the dollar. The Bureau of Labor Statistics (BLS) reported that Nonfarm Payrolls rose by 64,000 in November after a revised drop of 105,000 in October, and the unemployment rate increased to 4.6%^[16]. Slower job growth and a weaker labor market have strengthened the belief that the Fed will be cautious about changing policy^[17]. While these factors have kept the dollar from weakening much, they also encourage caution for both buyers and sellers of EUR/USD. Market analysts suggest support near 1.1639 and resistance at 1.1788. The 14-day RSI is still high, indicating that the market is stretched but not yet overbought. The EUR/USD pair trades lower near 1.1730, with downside limited by ECB hold expectations and mixed PMI signals, while upcoming US inflation and ECB guidance will shape near-term direction.

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Yen Falters Ahead of BoJ Decision as Dollar Finds Support

The Japanese yen weakened slightly in early Asian trading on Wednesday, with USD/JPY returning to 155.00 mark as the US dollar stabilized. This movement reflects short-term positioning ahead of the Bank of Japan’s (BoJ) policy meeting later this week^[18], rather than a significant change in market sentiment. Market traders expect the BoJ to raise rates at the conclusion of its two-day meeting on Friday^[19], particularly after Governor Kazuo Ueda expressed greater confidence in achieving Japan’s inflation target^[20]. This has reinforced expectations for policy normalization and is helping to limit further declines in the yen, despite its recent weakness. Global risk sentiment has turned more cautious. Concerns about China’s economy and high prices for tech stocks have weighed on equities, making traditional safe havens more attractive^[21]. This has helped limit yen losses, even though it dipped during the day^[22]. In the US, the dollar saw limited support from a mixed jobs report. November payrolls increased by 64,000, slightly above expectations, but previous months were revised lower and the unemployment rate rose to 4.6 percent, the highest since 2021. These figures indicate a cooling job market but have not altered expectations for Fed policy. With the Fed maintaining a patient approach and markets anticipating further easing next year, the dollar’s gains remain limited. Markets’ attention now shifts to US consumer inflation data on Thursday^[23] and, more importantly, the BoJ’s policy decision and guidance on Friday^[24], which will likely determine the next direction for USD/JPY. The USD/JPY pair trades back above 155.00, but conviction remains limited as investors await confirmation from the BoJ, with Fed caution and mixed global risk signals keeping the pair finely balanced.

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Sterling Trades Cautiously as Inflation Cools and BoE Looms

During Wednesday’s European session, GBP/USD held near 1.3425 above the mid-1.3300s. Sterling traded cautiously in response to new UK inflation and PMI data, while the US dollar remained firm. The pair rose early but retreated following the UK CPI release. UK headline inflation dropped to 3.2% year-on-year in November, down from 3.6% in October and below the expected 3.5%^{[25] [26]} , according to the Office for National Statistics. Core CPI also declined to 3.2%, indicating easing price pressures. This unexpected drop caused sterling to fall as markets reassessed the likelihood of a 25 basis point Bank of England rate cut at Thursday’s meeting. Some of that weakness was balanced by better UK activity data. Early PMIs for December PMIs showed the composite index rising to 52.1^[27], exceeding forecasts and signaling modest private-sector growth. Improved services steadied sentiment but did not alter market expectations of an imminent BoE rate cut^[28]. In the US, the dollar strengthened following a mixed jobs report. Nonfarm Payrolls rose by 64,000 in November, while October’s figures were revised lower and the unemployment rate increased to 4.6%. Slower wage growth supported the Fed’s cautious stance after last week’s rate cut. The dollar recovered as markets absorbed the data. Looking ahead, markets are focused on Thursday’s BoE decision, upcoming US CPI data, and further Fed commentary. Currently, GBP/USD remains range-bound, influenced by lower UK inflation and a stable US dollar. The GBP/USD exchange rate continues to consolidate above key support ~mid 1.3300s as markets balance cooling UK inflation, resilient services activity and a steadier US dollar ahead of the Bank of England’s policy decision.

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