Australian Dollar trades softly higher despite tariff concerns
- AUD/USD hovers above 0.6200, defending mild bids amid US tariff concerns and weak Chinese data.
- US PCE data showed no surprises, Fed remains cautious.
- RBA dovish bets continue to pressure the pair.
The Australian Dollar clings to mild gains on Friday, trading around 0.6215 after briefly touching a two-week low. The pair remains under pressure as US President Donald Trump reaffirmed plans to impose tariffs on Chinese imports, dampening risk sentiment.
Meanwhile, speculation over a potential rate cut by the Reserve Bank of Australia (RBA) in February and ongoing economic struggles in China continue to weigh on the Aussie.
Daily digest market movers: Aussie struggles on US tariffs concerns
- US confirms 25% tariffs on Canada and Mexico, 10% on China, effective February 1.
- US Dollar retreats as weak economic data erases weekly gains, pushing the DXY lower from its peak near 108.00.
- China’s PMI data disappoints with manufacturing contracting and services barely expanding, pressuring the Aussie.
- Iron ore prices hit yearly highs, offering mild support to AUD despite concerns over China’s weak demand.
- Markets consider that the RBA cutting rates in February is a done deal, which is also weakening the Aussie.
- On the US data front, the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's preferred inflation measure, rose by 0.3% MoM in December, following a 0.1% increase in November.
- On an annual basis, the PCE inflation rate increased to 2.6% from the previous month's 2.4%. The core PCE, which excludes food and energy prices, remained steady at 2.8% YoY for the third consecutive month.
- Markets are expecting no rate cut by the Fed in March.
Technical outlook: AUD/USD struggles for direction
AUD/USD remains confined within a narrow range, facing resistance near 0.6230 while holding support at 0.6200. The Relative Strength Index (RSI) stands at 42 in negative territory, reflecting a lack of clear directional momentum. Meanwhile, the Moving Average Convergence Divergence (MACD) histogram prints decreasing green bars, suggesting fading bullish strength.
Despite recent recovery attempts, the Aussie’s upside potential appears limited. A break below 0.6200 could trigger further losses, while a move above 0.6230 may offer short-term relief.
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.
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