Australia Dollar falls as market awaits Fed, Australian CPI
- AUD/USD slips towards 0.6270 on Monday.
- Trade tensions between the US and Colombia subside, dampening the Greenback.
- Fed expected to maintain rates at 4.25%-4.50% on Wednesday.
- All eyes are on Australian CPI for RBA policy clues.
AUD/USD declined at the start of the week towards 0.6270 as US Dollar (USD) gains evaporated following signs that United States (US) friction with Colombia could be cooling. Meanwhile, the Federal Reserve (Fed) is widely anticipated to keep interest rates unchanged this week, with traders searching for any insight into policymakers’ stance amid ongoing calls from President Donald Trump for immediate cuts.
The Australian Dollar (AUD), however, faces headwinds ahead of the release of domestic inflation data, which will determine the Reserve Bank of Australia’s (RBA) February rate decision.
Daily digest market movers: Aussie loses ground as markets await Fed and Aussie’s CPI
- The US Dollar initially firmed after President Trump threatened a 25% levy on Colombia for rejecting deportees. The Greenback later fell back as the White House confirmed Colombia’s acquiescence, dousing trade-war fears.
- Fed policy will be the focus. The US central bank meets on Wednesday and is likely to leave rates within 4.25%-4.50%.
- Market participants will examine how policymakers react to Trump’s demands for swift interest-rate cuts and assess the potential for future moves.
- Australian CPI will be pivotal. Fourth-quarter inflation data due Wednesday are forecast at 2.5% year-on-year, down from 2.8%, and a 0.3% quarterly increase following the previous 0.2%.
- Weak prints could fortify bets that the RBA may begin rolling back its policy tightness as early as the upcoming meeting.
AUD/USD technical outlook: Indecision reigns as traders seek clarity
The AUD/USD retreated to 0.6270 on Monday, experiencing choppy price action between 0.6200 and 0.6330 since last week. Despite opening the week at 0.6315, the pair settled near 0.6270, hinting at a mild bearish tone. The Moving Average Convergence Divergence (MACD) shows flat green bars, indicating some underlying bullish undercurrents, but the Relative Strength Index (RSI) at 55 points downwards, suggesting declining momentum. With key central bank decisions and inflation data on tap, participants are awaiting a clearer narrative before driving any substantial directional moves.
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.