AUD/USD softens on Monday as the Australian Dollar (AUD) struggles to gain traction despite a weaker US Dollar (USD), with traders digesting fresh trade-related uncertainty linked to US tariffs. At the time of writing, the pair is trading around 0.7051, easing after briefly climbing above the 0.7100 level earlier in the day.
On Friday, the US Supreme Court ruled that President Donald Trump’s use of the International Emergency Economic Powers Act (IEEPA) to impose sweeping tariffs was unlawful. Following the decision, and as he had previously indicated, President Trump moved to alternative legal measures to keep tariffs in place, announcing a 15% global tariff under Section 122 of the Trade Act of 1974.
The developments initially weighed on the Greenback before it stabilized somewhat as traders reassessed the outlook for US trade policy. However, the broader outlook for the USD remains tilted to the downside, as President Trump’s repeated use of tariffs as a policy tool continues to erode investor confidence in US policy credibility and fiscal stability, acting as a persistent headwind.
Still, the US Dollar’s relative outperformance against high-beta currencies reflects a cautious tone among traders. Even in the absence of strong domestic data, the Greenback continues to attract mild support as investors trim exposure to risk-sensitive currencies such as the Aussie.
The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is trading around 97.67 after touching an intraday low near 97.35.
Although fading expectations of a near-term Federal Reserve (Fed) interest rate cut are providing modest support to the Greenback. Sluggish fourth-quarter Gross Domestic Product (GDP) growth, coupled with firm Personal Consumption Expenditures (PCE) inflation readings, suggests the Fed may prefer to stay on hold for longer before resuming easing, with markets still pricing in around 50 basis points (bps) of rate cuts by year-end.
In Australia, traders are increasingly pricing in the possibility of another rate hike in March, supported by firmer domestic data and hawkish signals from policymakers. Attention now turns to inflation figures due on Tuesday, which could shape expectations for the Reserve Bank of Australia’s (RBA) next move.
Economists forecast the headline Consumer Price Index (CPI) to edge lower to 3.7% YoY in January from 3.8% in December. Meanwhile, the Trimmed Mean CPI — the RBA’s preferred core inflation gauge — is forecast to hold steady at 3.3% YoY.
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.
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