AUD/USD extends the range play around 0.6300 ahead of US PCE Price Index
- AUD/USD continues with its struggle to gain any meaningful traction on Friday.
- A modest USD uptick and a weaker risk tone act as a headwind for the Aussie.
- Hopes for more stimulus from China lend support ahead of the US PCE data.
The AUD/USD pair extends its sideways consolidative price move for the fourth straight day on Friday and remains confined in a range around the 0.6300 mark through the first half of the European session.
The global risk sentiment took a hit in reaction to US President Donald Trump's new tariffs on imported cars and light trucks, announced on Wednesday. Adding to this, Trump's impending reciprocal tariff announcement next week and their impact on the global economy further weigh on investors' sentiment. This, in turn, is seen acting as a headwind for the risk-sensitive Australian Dollar (AUD), which, along with a modest US Dollar (USD) uptick, exerts some pressure on the AUD/USD pair.
The intraday USD uptick, however, lacks bullish conviction in the wake of the growing acceptance that the Federal Reserve (Fed) will resume its rate-cutting cycle soon. In fact, the markets are now pricing in over a 65% chance that the US central bank would lower borrowing costs by at least 25 basis points in June amid worries about the potential economic fallout from Trump's aggressive trade policies. This might hold back the USD bulls from placing aggressive bets and support the AUD/USD pair.
Apart from this, hopes for more stimulus from China help limit losses for the Aussie. Traders also seem reluctant to place aggressive directional bets and opt to wait for the release of the US Personal Consumption Expenditure (PCE) Price Index, due later during the North American session. The crucial US inflation data would influence expectations about the Fed's future policy path, which, in turn, will play a key role in driving the USD demand and provide a fresh impetus to the AUD/USD pair.
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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