- The AUD/USD pair is pulling back from some intraday gains as the US dollar hits a new weekly high amid Donald Trump’s tariff announcements.
- Trump is set to impose 25% tariffs on Canada and Mexico, and 100% on BRICS countries.
- Investors are anticipating a shift in the RBA’s political stance starting in February.
The AUD/USD pair is giving back most of its intraday gains after facing selling pressure above 0.6230 during the European session on Friday, although it remains about 0.2% higher at the time of writing. The Australian dollar is retreating as the US dollar strengthens amid escalating concerns over a global trade war, with President Trump threatening significant tariffs on BRICS and other North American countries.
The US Dollar Index (DXY), which measures the greenback against six major currencies, has reached a new weekly high around 108.35.
Market participants expect that higher tariffs will lead to increased inflationary pressure, as this scenario is likely to boost domestic production, raise demand for labor, and ultimately drive wage growth. This situation would allow the Federal Reserve to maintain interest rates at their current levels for a longer period.
Meanwhile, investors are keeping an eye on the Australian dollar (AUD) against the US dollar, as traders have fully priced in the possibility that the Reserve Bank of Australia (RBA) will start cutting interest rates at its policy meeting in February. Analysts at ANZ predict that a sharper-than-expected slowdown in inflation will give the RBA enough confidence to lower its cash rate by 25 basis points at the next meeting.
The AUD/USD is correcting towards 0.6200 after failing to extend its 11-day recovery above 0.6330 from a more than four-year low of 0.6130. The pair bounced back after showing divergence in momentum and price action, with the 14-period Relative Strength Index (RSI) forming a higher peak while the pair made lower lows on the four-hour chart.
The asset has also dropped below the 50-period exponential moving average (EMA), which is trading around 0.6246.
Looking ahead, the pair could continue its downward trend if it fails to hold above the January 13 low of 0.6130. This could push it towards the round number of 0.6100 and the April 2020 low of 0.5990.
On the flip side, if it manages to break above the January 13 high of 0.6330, it could open the door for resistance at the round number of 0.6400 and the December 5 high of 0.6456.
AUD/USD Four-Hour Chart
Common Questions About the Australian Dollar
One of the key factors affecting the Australian dollar (AUD) is the interest rates set by the Reserve Bank of Australia (RBA). As a resource-rich country, another crucial driver is the price of its largest export, iron ore. The health of the Chinese economy, Australia’s biggest trading partner, also plays a significant role, along with inflation rates and trade balance in Australia. Market sentiment—whether investors are leaning towards riskier assets or seeking safe havens—also impacts the AUD positively when risk appetite is high.
The RBA influences the Australian dollar (AUD) by setting the interest rates at which Australian banks lend to each other. This impacts the overall interest rates in the economy. The RBA’s main goal is to maintain stable inflation between 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks tend to support the AUD, while lower rates have the opposite effect. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the AUD and the latter positive.
China is Australia’s largest trading partner, so the health of its economy significantly affects the value of the Australian dollar (AUD). When China’s economy is doing well, it tends to buy more raw materials, goods, and services from Australia, increasing demand for the AUD and boosting its value. Conversely, if China’s economy grows slower than expected, it can negatively impact the AUD. Surprises in China’s growth data often have a direct effect on the Australian dollar and its pairs.
Iron ore is Australia’s largest export, generating $118 billion annually as of 2021, with China being its main destination. Therefore, the price of iron ore can significantly drive the Australian dollar. Typically, when iron ore prices rise, the AUD also increases due to higher demand for the currency. The opposite is true when iron ore prices fall. Higher iron ore prices also tend to contribute to a positive trade balance for Australia, which is favorable for the AUD.
The trade balance, which is the difference between what a country earns from its exports and what it spends on imports, is another factor that can influence the value of the Australian dollar. If Australia produces highly sought-after exports, its currency will gain value due to the excess demand created by foreign buyers wanting to purchase its exports compared to what it spends on imports. Thus, a positive net trade balance strengthens the AUD, while a negative trade balance has the opposite effect.
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