Australian Dollar gains ground on USD softness
- AUD/USD remains confined below 0.6300, trading around 0.6260 on Tuesday.
- The pair has consolidated sideways for five consecutive sessions.
- Ongoing US tariff threats and mixed inflation data weigh on the Aussie.
- Expectations of an imminent RBA rate cut add to market uncertainty and cap further gains.
The Australian Dollar (AUD) remains in a sideways consolidative move for the fifth straight day, trading below the 0.6300 mark on Tuesday. Investor sentiment is cautious as United States (US) tariff threats on Chinese goods persist and Beijing retaliates, while market participants focus on US Q4 economic data and upcoming domestic Consumer Price Index (CPI) reports that could shape Reserve Bank of Australia (RBA) policy.
On Tuesday, markets reacted to Federal Reserve (Fed) Chair Jerome Powell’s testimony before the US Congress, which saw him take a cautious tone. Focus now shifts to inflation data from the US on Wednesday.
Daily Digest Market Movers: Aussie under pressure amid global trade and policy uncertainty
- The US Dollar Index (DXY) revisited the 108.00 support despite higher US yields and a cautious tone from Fed Chair Powell. With the upcoming release of the US Inflation Rate, along with testimony from Fed officials like Bostic and Waller, market participants anticipate further insights into the Fed's policy stance.
- Recent trade developments have been volatile. Trump’s imposition of a 25% duty on imports from Canada and Mexico, delayed by a month, provided short-lived relief, yet his 10% tariff on Chinese goods remains active.
- In retaliation, China has signaled it will contest these tariffs at the World Trade Organization (WTO), sparking concerns over reduced demand for Australia’s resource exports.
- On the domestic front, Australia’s Q4 Consumer Price Index (CPI) showed headline inflation at 2.5% YoY, down from 2.8%, and a trimmed mean CPI at a three-year low of 3.2%.
- These softer inflation readings have strengthened market expectations of a 25 basis point rate cut by the RBA in February, though many believe total easing could reach 85 basis points over the next year.
AUD/USD Technical Outlook: Consolidation persists as technicals hint at cautious momentum
The AUD/USD pair remains range-bound, currently trading around 0.6260 as the pair continues its sideways consolidation. While the market has held support below the 0.6300 resistance, technical indicators reflect a cautious outlook. The Relative Strength Index (RSI) is at 55, still positive but showing signs of a decline, which indicates that bullish momentum is weakening.
Concurrently, the Moving Average Convergence Divergence (MACD) histogram prints rising green bars, hinting at a gradual build in momentum. With the pair confined in a narrow range between approximately 0.6230 and 0.6300, traders are awaiting decisive US and Australian economic data to trigger a clear directional move.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.