AUD/USD drops as US Dollar gains on strong data, safe haven flows

AUD/USD trades around 0.7010 on Thursday at the time of writing, down 0.95% on the day, as the US Dollar (USD) continues to draw support from relatively strong US macroeconomic data and cautious market sentiment.

On the Australian side, the latest data delivered mixed signals. The Australian Bureau of Statistics reported that the trade surplus narrowed to A$2,631M in January, down from A$3,373M in December and well below the market consensus of A$3,900M. Exports declined by 0.9% MoM after a revised 0.9% increase previously, while imports rose by 0.8% following a revised 1.8% drop in the prior month.

These figures contrast with stronger economic growth data released earlier this week. Australia’s Gross Domestic Product (GDP) rose by 0.8% QoQ in the fourth quarter, beating expectations of 0.6%, while annual growth reached 2.6%, its highest level in three years. The expansion was largely driven by government spending and a rebound in inventories. This stronger growth backdrop reinforces expectations that the Reserve Bank of Australia (RBA) may maintain a tightening bias after raising its policy rate to 3.85% in February.

However, the pair remains under pressure as the US Dollar continues to benefit from solid economic momentum. Recent labor market data showed that Initial Jobless Claims in the United States (US) held steady at 213K for the week ending February 28, slightly below expectations of 215K, while Continuing Jobless Claims increased to 1.868M.

The Challenger, Gray & Christmas report also pointed to easing layoff activity in February. US-based employers announced 48.307K job cuts during the month, marking a sharp decline from 108.435K layoffs in January and significantly below the 172.017K cuts reported a year earlier. Despite the drop in announced layoffs, hiring plans have weakened considerably, falling 56% since the start of the year, suggesting that companies remain cautious about expanding their workforce even as large-scale job reductions moderate.

Additional indicators also point to underlying strength in the US economy. The ADP Employment Change report showed that the private sector added 63K jobs in February, beating the forecast of 50K and rising sharply from the previous revised reading of 11K. Meanwhile, the Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI) climbed to 56.1, significantly above expectations for a decline to 53.5.

As a result, market expectations for aggressive monetary easing from the Federal Reserve (Fed) have been scaled back. According to the CME FedWatch tool, the chance that the Fed will keep interest rates unchanged at its July meeting has increased to 50.4%, while the first rate cut is now expected in September.

Geopolitical developments are also shaping market sentiment. Escalating tensions in the Middle East, following US and Israeli strikes on Iran and the effective closure of the Strait of Hormuz, have supported demand for safe-haven assets such as the US Dollar. Although hopes briefly emerged that diplomatic channels could reopen after reports of potential talks between Iran and the United States, Tehran later denied the claims, leaving the outlook for the conflict uncertain.

Looking ahead, investors now turn their attention to Friday’s key US releases, including the Nonfarm Payrolls (NFP) report and January Retail Sales, which could provide further clues about the strength of the US labor market and the likely path of Fed policy.