AUD/USD Forecast and News

The US Dollar (USD) kicked off a new trading week on a strong foot, sending the US Dollar Index (DXY) past the key barrier of 110.00. Meanwhile, the Australian Dollar (AUD) treaded water in the lower end of its current range around the mid-0.6100s, an area last visited in April 2020.

What’s pressuring the Aussie?

The Aussie has been struggling against a reinvigorated US Dollar, which kicked off the new year with strength, building on its rally since October thanks to the so-called "Trump trade." This dollar strength has left the Australian currency on the defensive.

Adding to the pressure, the Reserve Bank of Australia (RBA) has hinted at a possible shift toward cutting interest rates. Minutes from the RBA's December meeting revealed that while the central bank believes its restrictive monetary policy remains appropriate for now, it’s prepared to consider a rate cut as early as February—provided economic data supports the case. Markets are now pricing in a 62% chance of a February rate cut, a dovish turn that contrasts sharply with the Federal Reserve’s more cautious tone on further easing.

Sentiment around the Aussie has also been weighed down by broader market risk aversion and persistent concerns about China’s slowing economy, a key trading partner for Australia.

Weak Australian fundamentals

The Aussie’s troubles haven’t been helped by disappointing domestic economic data. The latest GDP figures for the July–September quarter showed the economy growing by just 0.3% quarter-on-quarter and 0.8% year-on-year, both missing expectations. This weak performance further dampened confidence in the Australian economy.

Even rising prices for Australia’s key exports, such as copper and iron ore, haven’t provided much relief. While copper prices started the year strongly and iron ore prices have recovered slightly after a weak start, these gains have failed to translate into meaningful support for the Aussie. Meanwhile, the lack of movement in the Chinese Yuan and lingering uncertainty about China's economic stimulus have added to the currency's struggles.

The RBA’s cautious approach

At its December meeting, the RBA kept interest rates steady at 4.35%, as expected. However, it surprised markets by signalling the possibility of a rate cut in February, dropping its earlier neutral stance. The RBA now appears more confident that inflation is trending toward its target, noting that “some of the upside risks to inflation appear to have eased.” This is a significant shift from its previous warnings about inflationary risks.

RBA Governor Michele Bullock remained measured in her comments, avoiding firm commitments on future policy. She emphasized that the Board had not explicitly decided on cutting or raising rates, nor had it set specific conditions for a February move.

Challenges and opportunities for AUD/USD

Looking ahead, the AUD/USD faces a tough path. On the downside, persistent US inflation, a resilient US Dollar, the RBA’s dovish tilt, and China’s economic slowdown pose significant challenges. However, should the Fed shift toward fewer rate cuts, it could offer some reprieve for the Aussie.

Overall, the combination of domestic and international pressures leaves the Australian Dollar facing an uphill battle in the near term.

Key data to watch 

The next salient event on the Australian calendar will be the release of the Consumer Confidence index by Westpac on January 14, seconded by the final prints of Building Permits for the month of November. Later in the week, the publication of the Australian labour market report should take centre stage on January 16, followed by Consumer Inflation Expectations towards the end of the week.

Bottom Line 

The Australian Dollar remains under pressure, caught between domestic challenges and global uncertainties. While there’s room for recovery, much will depend on upcoming data from Australia, the US, and China, as well as the RBA’s timing for an interest rate cut. For now, caution seems to be the prevailing sentiment.