AUD/USD extends upside above 0.6500 as RBA rate cut hopes fade

AUD/USD strengthens to around 0.6505 in Thursday’s early Asian session.
Australian monthly CPI inflation climbs to 2.8% in July from 1.9% in June.
Concerns over the Fed’s independence persist, weighing on the US Dollar.

Lallalit Srijandorn FXStreet

The AUD/USD pair extends the rally to near 0.6505 during the early Asian session on Thursday. The Australian Dollar (AUD) edges higher against the US Dollar (USD) as hotter-than-expected Australian inflation data dents bets on the Reserve Bank of Australia (RBA) rate cut. The second estimate of the US Gross Domestic Product (GDP) report for the second quarter (Q2) will take center stage later on Thursday.

Data released by the Australian Bureau of Statistics (ABS) on Wednesday showed that the country’s monthly Consumer Price Index (CPI) rose 2.8% YoY in July, compared to an increase of 1.9% in June. This figure came in above the market consensus of 2.3% and registered the highest rate since July 2024.

The hotter Australian inflation data has pushed back expectations for another RBA rate reduction. Analysts expect a September rate cut to be highly unlikely, with the board expected to wait until the November meeting, once the September quarter CPI is released on October 29.

On the USD’s front, unabated concerns over the Federal Reserve’s (Fed) independence could exert some selling pressure on the Greenback. US President Donald Trump stated on Monday that he has fired Fed Governor Lisa Cook, the first instance of a president firing a central bank governor in the Fed’s history. In response, Cook said Trump has no authority to fire her from the central bank, and she will not resign.

The second estimate of US GDP is due later on Thursday, which is expected to grow at an annual rate of 3.1% in Q2. In case of a stronger-than-expected outcome, this could underpin the Greenback in the near term.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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