The Australian Dollar (AUD) saw a second consecutive day of gains on Friday, fueled by US President Donald Trump’s decision to delay the imposition of reciprocal tariffs. The AUD/USD pair strengthened further as the US Dollar (USD) weakened, driven by declining US yields across the board, despite ongoing trade war uncertainties. Market participants are now turning their attention to the upcoming release of US Retail Sales data later today.
However, the Australian Dollar may face challenges in the near term, as expectations of a potential rate cut by the Reserve Bank of Australia (RBA) remain firm, following the latest inflation outlook. Consumer inflation expectations surged to 4.6% in February, up from 4.0% in January, marking the highest level since April 2024. This comes ahead of the RBA’s first monetary policy meeting of the year next week, with markets pricing in a 95% probability of a rate cut to 4.10%. The expectation is driven by recent data indicating that underlying inflation is cooling more swiftly than anticipated.
Despite the AUD’s recent strength, its upside potential may be constrained by robust US inflation data, which bolsters expectations for prolonged Federal Reserve (Fed) rate holds. Fed Chair Jerome Powell reaffirmed that the central bank is not inclined to reduce rates anytime soon, highlighting a resilient economy and stubbornly high inflation as key factors influencing the Fed’s policy stance.
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