On Wednesday, the Australian Dollar (AUD) remained stable, showing little movement. This came as traders adopted a cautious approach ahead of the Federal Reserve’s interest rate decision. The AUD/USD pair managed to hold its ground, with the US Dollar (USD) staying firm. The stability of US yields provided support to the USD ahead of the Fed’s much – anticipated announcement later in the day. Given persistent inflation concerns and heightened economic uncertainty, market expectations leaned towards the Fed keeping interest rates unchanged.
Domestic and International Economic Factors at Play
Australia’s Westpac Leading Index saw an improvement in February, rising to 0.8% from 0.6% in January. This increase indicated continued domestic resilience, even as currency and commodity tailwinds started to fade. Although the impact of tariff shocks was beginning to surface, domestic factors were still providing solid support to the economy.
Australia’s Treasurer, Jim Chalmers, made waves in the trade discussion. In a speech on Tuesday, he criticized the Trump administration’s trade policies. Chalmers labeled them as “self – defeating and self – sabotaging.” He emphasized that Australia needed to focus on economic resilience rather than engaging in retaliatory actions. Chalmers also condemned the US decision to exclude Australia from steel and aluminum tariff exemptions, calling it “disappointing, unnecessary, senseless, and wrong.”
Reserve Bank of Australia (RBA) Assistant Governor (Economic) Sarah Hunter, on Monday, reiterated the central bank’s cautious stance on rate cuts. The RBA’s February statement had signaled a more conservative approach compared to market expectations, with a close eye on US policy decisions and their potential impact on Australia’s inflation outlook.
US Dollar and Global Developments
The US Dollar Index (DXY), which measures the USD against six major currencies, was trading in positive territory near 103.40 at the time of reporting. However, the USD faced challenges. Weak US economic data and renewed tariff threats from President Donald Trump added to investor uncertainty.
The US Census Bureau reported that Retail Sales in February increased by only 0.2% month – over – month, falling short of the market expectation of 0.7%. This followed a revised decline of -1.2% in January (initially reported as -0.9%). On a yearly basis, Retail Sales grew by 3.1%, down from the revised 3.9% in January (previously 4.2%).
In geopolitical news, US President Donald Trump and Russian President Vladimir Putin agreed to an immediate pause in strikes targeting energy infrastructure in the Ukraine war. However, Putin declined to back a broader month – long ceasefire negotiated by Trump’s team with Ukrainian officials in Saudi Arabia, indicating that tensions still remained.
Trump also reaffirmed plans to impose reciprocal and sectoral tariffs on April 2. He confirmed that there would be no exemptions for steel and aluminum and mentioned that reciprocal tariffs on specific countries would be implemented alongside auto duties. In response, Australian Prime Minister Anthony Albanese confirmed that Australia would not impose reciprocal tariffs on the US, stating that such retaliatory measures would only increase costs for Australian consumers and fuel inflation.
China’s Influence on the AUD
China introduced a special action plan over the weekend aimed at boosting consumption and improving market sentiment across the region. The plan included measures such as raising wages, encouraging household spending, and stabilizing stock and real estate markets. Given China’s role as Australia’s key trading partner, any positive developments related to this stimulus plan could further support the AUD.
China’s economic data also showed some positive signs. Retail sales grew by 4.0% year – over – year in January – February, an improvement from December’s 3.7% increase. Industrial production rose 5.9% YoY during the same period, exceeding the 5.3% forecast but slightly lower than the previous reading of 6.2%.
AUD/USD Technical Outlook
The AUD/USD pair was trading around 0.6360 on Wednesday. It maintained a bullish trajectory, continuing to climb within the ascending channel on the daily chart. The 14 – day Relative Strength Index (RSI) remained above 50, which reinforced the positive momentum.
Looking ahead, the pair might attempt to retest its three – month high of 0.6408, last reached on February 21. A breakout above this level could strengthen the bullish bias, potentially driving the pair towards the upper boundary of the ascending channel near 0.6490.
On the downside, key support was at the nine – day Exponential Moving Average (EMA) of 0.6334, which aligned with the lower boundary of the ascending channel. Further support was seen at the 50 – day EMA at 0.6311. A decisive break below this critical zone could weaken the bullish outlook, exposing the AUD/USD pair to further downside pressure towards the six – week low of 0.6187, recorded on March 5.
Key Factors Affecting the Australian Dollar
Interest Rates
One of the most significant factors influencing the Australian Dollar is the level of interest rates set by the Reserve Bank of Australia (RBA). By setting the interest rates at which Australian banks lend to each other, the RBA affects the overall interest rate environment in the economy. The RBA’s main objective is to maintain a stable inflation rate of 2 – 3% through interest rate adjustments. Relatively high interest rates compared to other major central banks tend to support the AUD, while relatively low rates have the opposite effect. The RBA can also use quantitative easing and tightening measures to influence credit conditions, with the former being negative for the AUD and the latter positive.
Commodity Prices
As a resource – rich country, the price of Australia’s largest export, Iron Ore, plays a crucial role. In 2021, Iron Ore exports accounted for $118 billion, with China being the primary destination. Generally, when the price of Iron Ore rises, the demand for the AUD increases, driving up its value. Conversely, a fall in Iron Ore prices leads to a decline in the AUD. Higher Iron Ore prices also increase the likelihood of a positive Trade Balance for Australia, which is beneficial for the currency.
Chinese Economy
China is Australia’s largest trading partner. When the Chinese economy is performing well, it purchases more raw materials, goods, and services from Australia. This increased demand for Australian exports boosts the demand for the AUD and raises its value. Conversely, if the Chinese economy grows slower than expected, it has a negative impact on the AUD. Positive or negative surprises in Chinese economic growth data often directly affect the Australian Dollar and its currency pairs.
Trade Balance
The Trade Balance, which is the difference between a country’s export earnings and import payments, also impacts the Australian Dollar. If Australia’s exports are highly sought – after, the surplus demand from foreign buyers seeking to purchase these exports, compared to the amount spent on imports, increases the value of the AUD. So, a positive net Trade Balance strengthens the AUD, while a negative one weakens it.
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