- US Dollar Index slips to 101.50 amid softer than expected April CPI figures and ongoing trade talks.
- Australian Dollar rises sharply, bolstered by improved risk sentiment and reduced US-China trade tensions.
- Market expects the Federal Reserve to hold rates steady through mid-2025 with a potential rate cut in September 2025.
- Tariff reductions between the US and China are easing global trade concerns, benefiting Australia’s export-driven economy.
The US Dollar faced downward pressure on Tuesday, retreating to 101.50, following a softer than expected Consumer Price Index (CPI) for April. The Australian Dollar, on the other hand, surged by nearly 1.5% against the US Dollar, boosted by improving global sentiment and the easing of US-China trade tensions. Investors now eye further economic data. The market expects that the Federal Reserve (Fed) will maintain its current rate policy through mid-2025.
Daily digest market movers: US down as markets digest CPI readings, Fed bets adjust
- US Dollar Index struggles as inflation data comes in below forecasts; CPI rises 2.3% YoY, missing 2.4% expectation.
- Fed Governor Adriana Kugler warns of inflationary risks from tariffs while signaling a shift in policy focus.
- The US and China reach a significant milestone in trade talks, agreeing to suspend part of their tariffs for 90 days, reducing tariffs to 30% on US goods and 10% on Chinese imports.
- President Trump pushes for aggressive tax cuts and investment agreements, but the market remains cautious amid unclear economic impacts.
- The Australian Dollar gains traction as the US Dollar weakens as a combination of softer inflation data and trade progress lifts risk-sensitive currencies.
- The market now anticipates that the Fed will hold rates steady until at least September 2025 with rate cuts expected to follow.
- China's tariff reductions offer relief to the global economy, with Australian exports set to benefit from improved trade relations.
- While inflation remains a concern, the data points to a shift toward more dovish expectations for the Fed.
- The US economic outlook is clouded by political uncertainties, including President Trump’s tax plans and ongoing tariff disputes.
Technical analysis: Bulls return to Aussie
The AUD/USD pair has flashed a bullish signal, trading around 0.6500, up approximately 1.6% on the day. The Relative Strength Index (RSI) remains in the 50s, indicating neutral momentum, while the Moving Average Convergence Divergence (MACD) signals a potential sell signal. The Commodity Channel Index (CCI) is trading in the 80s, pointing to neutral conditions despite the pair's upward move.
Key resistance is seen around 0.6500 with the next level at 0.6700. Immediate support lies at 0.6459, followed by 0.6427 and 0.6420. The 20, 100 and 200-day Simple Moving Averages (SMAs) support a bullish outlook, while the 10-day Exponential Moving Average (EMA) and 10-day SMA near 1.00 further corroborate the buy signal. The RSI is at 58, signaling potential continuation of bullish momentum in the short term.
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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