- AUD/USD fell to around 0.6190 in the early Asian session on Monday.
- The Fed is expected to keep interest rates steady at its January meeting.
- Trump’s tariff threat could put pressure on the Australian dollar.
The AUD/USD pair weakens to around 0.6190, snapping a two-day losing streak during the early Asian session on Monday. Markets turned cautious with the inauguration of President-elect Donald Trump later on Monday. The US market is closed on Monday due to the Martin Luther King Day bank holiday.
Concerns about Trump’s pledges, including tariffs, extending tax cuts, and deporting illegal immigrants, contributed to a rise in US Treasury yields and the dollar before he took office. Analysts believe that the US Federal Reserve’s future interest rate path will depend on how aggressively the incoming Trump administration follows through on those pledges.
Investors will be closely watching Trump’s executive orders, which he plans to issue just hours after he is sworn in. The Fed is expected to keep interest rates unchanged at its January meeting and resume cuts in March, according to a narrow majority of economists polled by Reuters.
The possibility of renewed trade tensions between the US and China and the possibility of higher Trump tariffs could put some selling pressure on the Australian Dollar (AUD) as China is a major trading partner of Australia. However, upbeat Chinese economic data on Friday could support the Australian Dollar (AUD). China’s economy grew by 5.4% year-on-year in the fourth quarter of 2024, compared to a 4.6% expansion in the third quarter. This reading was significantly stronger than expectations of 5%.
Frequently asked questions about the Australian dollar
One of the most important 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 major driver is the price of its largest export, iron ore. The health of the Chinese economy, its largest trading partner, is one factor, as well as Australia’s inflation, growth rate and trade. balance. Market sentiment – whether investors are snapping up riskier assets (risk on) or looking for safe havens (risk off) – is also a factor, with risk appetite positive for 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 affects the level of interest rates in the economy as a whole. The RBA’s main objective 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 Australian dollar, and relatively low ones do the opposite. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being AUD negative and the latter AUD positive.
China is Australia’s largest trading partner, so the health of the Chinese economy has a major impact on the value of the Australian Dollar (AUD). When the Chinese economy is performing well, it buys more raw materials, goods and services from Australia, which raises demand for the Australian dollar, raising its value. The opposite is the case when the Chinese economy does not grow as quickly as expected. Therefore, positive or negative surprises in Chinese growth data often have a direct impact on the Australian dollar and its crosses.
Iron ore is Australia’s largest export, representing $118 billion annually according to 2021 data, and China is its main destination. Therefore, the price of iron ore could be a driver of the Australian dollar. In general, if the price of iron ore rises, the Australian dollar also rises, as overall demand for the currency increases. The opposite is the case if the price of iron ore falls. Higher iron ore prices also tend to increase the likelihood of a positive trade balance for Australia, which is also positive for the Australian dollar.
The balance of trade, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can affect the value of the Australian dollar. If Australia produces highly sought-after exports, its currency will gain value from the excess demand generated by foreign buyers seeking to buy its exports in exchange for what it spends to buy imports. Therefore, a positive net trade balance strengthens the Australian dollar, with the opposite effect if the trade balance is negative.
Source: https://www.fxstreet.com/news/aud-usd-holds-below-06200-ahead-of-trumps-inauguration-202501192323