Christian Borjon Valencia
FXStreet
- AUD/USD gains after touching a peak of 0.6301 on The Washington Post tariffs article.
- Mixed US economic data shows a dip in Services PMI and a contraction in Factory Orders, fueling market volatility.
- Australian Services PMI indicates economic resilience, boosting optimism as the RBA contemplates future rate cuts.
The Australian Dollar (AUD) has risen from two-year lows and hit the 0.6300 figure yet sits in the mid-range of the 0.62-0.63 area as the Asian Pacific session is about to begin. At the time of writing, the AUD/USD pair trades at 0.6245, gaining over 0.51%.
AUD/USD rises as market sentiment shifts following tariff news
The US Dollar began the week on the defensive following an article in The Washington Post that said that aides of Trump’s team were working on tariffs, not universal but focused on crucial sectors. The market reacted positively, sending the AUD/USD towards 0.6301, while the US Dollar Index (DXY), which measures the buck’s value against six currencies, plunged to a four-day low of 107.75.
However, US President-elect Donald Trump denied the news, underpinning the Greenback, and the AUD/USD retreated.
Data-wise, S&P Global revealed that December business activity in the US deteriorated as the Services PMI dipped from 58.5 to 56.8, exceeding estimates of 56.1. Finally, Factory Orders collapsed from an upwardly revised October of 0.5% and contracted -0.4% MoM in November, exceeding forecasts of -0.3%.
Federal Reserve Governor Lisa Cook crossed the wires and said that the US central bank could adopt a cautious approach with additional interest rate cuts, given a solid economy and stickier inflation than expected.
On Australia’s front, the S&P Global Australia Services PMI rose from 50.4 to 50.8 in December, underscoring the strength of its economy.
Jingyi Pan, Economics Associate Director at S&P Global Market Intelligence, wrote: “The final reading of Australia’s Services PMI offered better news for growth than the flash reading in signaling a stronger services sector expansion at the end of 2024. This was driven by a quicker rise in new business, with external demand notably improving for the first time in four months.”
Ahead of the session, the Australian economy docket will feature monthly inflation data and retail sales figures.
Market players see a 55% chance that the Reserve Bank of Australia (RBA) will cut rates from its 4.35% cash rate to 4.10% in the April 2025 meeting.
In the US, the docket will feature the ISM Services PMI, Initial Jobless Claims and the crucial US Nonfarm Payrolls report this week.
AUD/USD Price Forecast: Technical outlook
The AUD/USD failed to conquer the 0.6300 figure, opening the door for a consolidation around 0.6200 – 0.6250 range. The pair has been carving succesive series of lower highs and lower lows, hinting the downtrend remains intact, with sellers eyeing further downside.
The first support would be 0.6200. The next stop would be the October 13 low of 0.6169 if cleared.
Conversely, if buyers lift the exchange rate above 0.6300, this would exacerbate a rally to 0.6400, ahead of the 50-day Simple Moving Average (SMA) at 0.6424.
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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