AUD/USD refreshes two-month high near 0.6370 ahead of RBA monetary policy

AUD/USD gains to near 0.6370 as the market sentiment is favorable for risk-sensitive assets.
Delayed Trump’s reciprocal tariffs and hope of a Russia-Ukraine truce have improved the market mood.
The RBA is expected to cut its OCR by 25 bps to 4.1% on Tuesday.

Sagar Dua FXStreet

The AUD/USD pair posts a fresh two-month high at 0.6373 in Monday’s European session. The Aussie pair strengthens as the Australian Dollar (AUD) performs strongly on upbeat market mood. Market sentiment is favorable for risky assets as investors expect United States (US) President Donald Trump’s tariff agenda won’t be as impactful as anticipated.

A delay in Trump’s reciprocal tariffs has eased fears of an immediate global trade war. Apart from that, growing optimism toward Russia-Ukraine peace has also kept risky assets on the front foot.

Meanwhile, the major trigger for the Australian Dollar is the Reserve Bank of Australia’s (RBA) monetary policy meeting, which is scheduled for Tuesday. The RBA is almost certain to cut its Official Cash Rate (OCR) by 25 basis points (bps) to 4.10%. This would be the first interest rate cut by the RBA in almost five years.

Amid firm expectations that the RBA will reduce its borrowing rates, investors will pay close attention to RBA Governor Michele Bullock’s press conference to get cues about the inflation and the interest rate outlook.

The US Dollar (USD) ticks higher but trades cautiously amid risk-on market mood and poor US Retail Sales data for January. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, wobbles around the two-month low near 106.80.

On Friday, the US Census Bureau reported that Retail Sales, a key measure of consumer spending, declined by 0.9% on month. Economists expected the consumer spending measure to have contracted marginally by 0.1%.

(The story was corrected at 10:36 GMT to say in the first line that The AUD/USD pair posts a fresh two-month high, not low, at 0.6373 in Monday’s European session.)

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

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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