Australian Dollar struggles for direction after softer CPI
- AUD/USD trades near the 0.6300 zone after volatile swings during Wednesday's session.
- Softer-than-expected CPI data prompts RBA rate cut speculation but is offset by inflationary concerns from fiscal policy.
- Technical indicators point to a mixed outlook, with short-term averages flashing bearish signals.
The Australian Dollar (AUD) Index hovered near recent levels on Wednesday as market sentiment shifted in response to the latest inflation data. The Aussie showed little direction during the North American session, fluctuating around the 0.6300 zone after Australia’s Monthly Consumer Price Index showed that price growth slowed more than anticipated. Traders balanced the dovish monetary implications of the inflation figures against concerns of fiscal-driven price pressures from the recent budget.
Daily digest market movers: Australian Dollar flatlines as CPI cools, but fiscal policy stirs concerns
- The Australian Dollar struggled to build momentum as inflation data revealed a slower annual rise of 2.4% in February, below prior estimates and readings.
- The softer CPI reading bolstered expectations of potential rate cuts by the Reserve Bank of Australia (RBA), though traders also eyed budget-related inflation risks.
- Treasurer Jim Chalmers announced tax cuts for low-to-middle-income earners and further energy subsidies, prompting caution over future price stability.
- In the US, traders remained cautious ahead of Friday’s release of the core Personal Consumption Expenditures Price Index, the Federal Reserve’s (Fed) favored inflation gauge.
- The US Dollar Index (DXY) stayed above the 104.00 mark, recovering from last week’s lows, driven by stronger Treasury yields and persistent trade concerns.
- Market attention is also fixed on the April 2 announcement of reciprocal trade tariffs by US President Donald Trump, with speculation that exemptions may be granted to select partners.
- Recent comments from Fed officials reflected a cautious stance, noting ongoing uncertainty and trimming projections for rate adjustments in 2025.
- Despite easing CPI figures, inflation remains sticky in Australia’s services sector, particularly in rentals and financial services, keeping the RBA’s path uncertain.
- The RBA's February cut to 4.10% and Governor Michele Bullock’s measured tone continue to shape market expectations ahead of the next policy meeting.
- Short bets on the Australian Dollar remain elevated, with the latest CFTC data showing bearish positioning near multi-week highs.
- Investors will look toward upcoming quarterly inflation data and any further fiscal stimulus signals to better gauge the RBA’s next move.
AUD/USD Technical analysis
During Wednesday’s American session, the AUD/USD pair showed modest losses, trading near the 0.6300 mark after failing to sustain recent gains. Technical indicators remain tilted to the downside. The MACD printed a fresh red bar, suggesting renewed bearish pressure, while the Relative Strength Index fell to 47, reflecting a move into negative territory. Despite a neutral Stochastic reading, the combination of soft momentum and mixed moving averages paints a bearish picture. The 10-day EMA and 10-day SMA currently signal downside risk, whereas the 20-day SMA offers limited support. Immediate support levels are found near 0.6298, followed by 0.6297 and 0.6294. On the upside, resistance is located around 0.6304 and 0.6307.
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.