Australian Dollar gains ground on USD softness
- AUD/USD remains confined below 0.6300, trading around 0.6260 on Tuesday.
- The pair has consolidated sideways for five consecutive sessions.
- Ongoing US tariff threats and mixed inflation data weigh on the Aussie.
- Expectations of an imminent RBA rate cut add to market uncertainty and cap further gains.
The Australian Dollar (AUD) remains in a sideways consolidative move for the fifth straight day, trading below the 0.6300 mark on Tuesday. Investor sentiment is cautious as United States (US) tariff threats on Chinese goods persist and Beijing retaliates, while market participants focus on US Q4 economic data and upcoming domestic Consumer Price Index (CPI) reports that could shape Reserve Bank of Australia (RBA) policy.
On Tuesday, markets reacted to Federal Reserve (Fed) Chair Jerome Powell’s testimony before the US Congress, which saw him take a cautious tone. Focus now shifts to inflation data from the US on Wednesday.
Daily Digest Market Movers: Aussie under pressure amid global trade and policy uncertainty
- The US Dollar Index (DXY) revisited the 108.00 support despite higher US yields and a cautious tone from Fed Chair Powell. With the upcoming release of the US Inflation Rate, along with testimony from Fed officials like Bostic and Waller, market participants anticipate further insights into the Fed's policy stance.
- Recent trade developments have been volatile. Trump’s imposition of a 25% duty on imports from Canada and Mexico, delayed by a month, provided short-lived relief, yet his 10% tariff on Chinese goods remains active.
- In retaliation, China has signaled it will contest these tariffs at the World Trade Organization (WTO), sparking concerns over reduced demand for Australia’s resource exports.
- On the domestic front, Australia’s Q4 Consumer Price Index (CPI) showed headline inflation at 2.5% YoY, down from 2.8%, and a trimmed mean CPI at a three-year low of 3.2%.
- These softer inflation readings have strengthened market expectations of a 25 basis point rate cut by the RBA in February, though many believe total easing could reach 85 basis points over the next year.
AUD/USD Technical Outlook: Consolidation persists as technicals hint at cautious momentum
The AUD/USD pair remains range-bound, currently trading around 0.6260 as the pair continues its sideways consolidation. While the market has held support below the 0.6300 resistance, technical indicators reflect a cautious outlook. The Relative Strength Index (RSI) is at 55, still positive but showing signs of a decline, which indicates that bullish momentum is weakening.
Concurrently, the Moving Average Convergence Divergence (MACD) histogram prints rising green bars, hinting at a gradual build in momentum. With the pair confined in a narrow range between approximately 0.6230 and 0.6300, traders are awaiting decisive US and Australian economic data to trigger a clear directional move.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
