Australian Dollar turns down after US CPI and Powell’s testimony
- AUD/USD declined by 0.30% to 0.6265 on Thursday.
- The pair remains confined below 0.6300 despite the USD weakness.
- US inflation data came in higher than expected but the USD trades in the red.
The Australian Dollar (AUD) extends its sideways consolidation as AUD/USD softens to around 0.6260 in Wednesday’s session, falling 0.30% on the day. The pair has succumbed to selling pressure after briefly flirting with the key 0.6300 hurdle amid persistent risk-off sentiment while markets assess inflation data from the United States (US) and Federal Reserve’s (Fed) Chair Jerome Powell’s testimony before the US Congress.
Daily Digest Market Movers: Aussie under pressure amid US inflation and trade tension
- Recent US inflation data came in stronger than expected, with the headline US Consumer Price Index (CPI) rising 0.5% MoM (vs. a 0.3% forecast) and the core US CPI jumping 0.4% (exceeding expectations). This has reinforced the Fed’s hawkish stance and bolstered the US Dollar.
- In addition, Fed Chair Jerome Powell sounded cautious during his second testimony before the US Congress.
- He reaffirmed the Fed’s independence and rejected any political pressure to alter policy direction.
- He also stated that inflation progress has slowed, but the 2% target remains the central bank’s priority.
- On the home front, softer Q4 Consumer Price Index (CPI) data in Australia shows headline inflation at around 2.5% YoY (down from 2.8%), with the trimmed mean CPI falling to a three-year low of 3.2%. These figures have increased market expectations of a 25 basis point RBA rate cut in February, though ongoing trade tensions with China continue to pressure the Aussie.
- Despite some recovery in commodity prices, weak business activity in China remains a drag on the AUD. The US Dollar, meanwhile, has reasserted strength due to persistent risk aversion and expectations of a tighter Fed policy, limiting further gains for the AUD/USD pair.
AUD/USD Technical Outlook: Consolidation with signs of cautious momentum
The pair has struggled to break through the key 0.6300 resistance, highlighting persistent selling pressure amid a choppy session. The Relative Strength Index (RSI) stands at 55—indicating that, despite some buyer interest, momentum is not robust. Meanwhile, the Moving Average Convergence Divergence (MACD) histogram shows rising green bars, hinting at a gradual build in bullish momentum.
With support around 0.6200 and resistance near 0.6300, traders are closely monitoring the upcoming US economic data and RBA signals to determine the next directional move for AUD/USD.
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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