- The Aussie Dollar drifts lower as optimism about the US-China deal wanes.
- A weak US Dollar is keeping the AUD from falling lower.
- Later today, the US CPI and a Treasury Bond auction will determine the USD's direction.
The Australian Dollar is trading lower on Wednesday, retracing Tuesday’s gains as the frail enthusiasm about an alleged trade deal between the US and China faded, with markets turning cautious ahead of the release of US Inflation data.
US and China seem to have reached a deal to ease restrictions on rare metals’ trade and reduce tariffs, but the parties have offered few details about the agreement, which grants little guarantee about its durability.
Markets reacted with moderate enthusiasm immediately after the news, but optimism faded soon. The Aussie Dollar went through a limited upside reaction before losing ground, returning to levels right above 0.6500 at the moment of writing.
A weak US Dollar keeps the Aussie afloat
The US Dollar, on the other hand, is pulling back from previous highs. The USD Index, which measures the value of the Dollar against the world’s most traded currencies, has retreated below the 99.00 level after hitting 99.20 highs immediately after the trade deal.
Investors are growing increasingly cautious ahead of the US Consumer Price Index release. The monthly CPI is expected to have remained steady at 0.2%, with the yearly rate accelerating to 2.5% from the previous 2.3%. The Core CPI is seen increasing to 0.3% on the month and 2.9% year-on-year, from 0.2% and 2.8% respectively.
Beyond that, the US Treasury faces a $39 billion auction of 10-year Bonds, amid rising concerns about the country’s fiscal health. A significant decline in demand from May’s auction might increase bearish pressure on the USD.
US-China Trade War FAQs
Generally speaking, a trade war is an economic conflict between two or more countries due to extreme protectionism on one end. It implies the creation of trade barriers, such as tariffs, which result in counter-barriers, escalating import costs, and hence the cost of living.
An economic conflict between the United States (US) and China began early in 2018, when President Donald Trump set trade barriers on China, claiming unfair commercial practices and intellectual property theft from the Asian giant. China took retaliatory action, imposing tariffs on multiple US goods, such as automobiles and soybeans. Tensions escalated until the two countries signed the US-China Phase One trade deal in January 2020. The agreement required structural reforms and other changes to China’s economic and trade regime and pretended to restore stability and trust between the two nations. However, the Coronavirus pandemic took the focus out of the conflict. Yet, it is worth mentioning that President Joe Biden, who took office after Trump, kept tariffs in place and even added some additional levies.
The return of Donald Trump to the White House as the 47th US President has sparked a fresh wave of tensions between the two countries. During the 2024 election campaign, Trump pledged to impose 60% tariffs on China once he returned to office, which he did on January 20, 2025. With Trump back, the US-China trade war is meant to resume where it was left, with tit-for-tat policies affecting the global economic landscape amid disruptions in global supply chains, resulting in a reduction in spending, particularly investment, and directly feeding into the Consumer Price Index inflation.
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