Despite the risk-off mentality, the Australian dollar remains stable, with the US PCE being eyed.

• The Australian Dollar stands to lose in the event that renewed threats over Trump tariffs promote risk aversion.
• Trump administration is actively working on tariffs implementation on imports from China.
• Traders are looking forward to the US Personal Consumption Expenditures data later on Friday.

The Australian Dollar (AUD) will try to put an end to its four-day losing streak against the US Dollar (USD) on Friday. However, the AUD/USD pair declined because of risk-off sentiment after renewed tariff threats by US President Donald Trump against China. Investors await more clarity from Trump’s tariff policies.

President Trump again repeated his intent on Thursday to impose 25% tariffs on Canada and Mexico but did not set a specific timeline for China. However, he said China would be dealt with, that his administration is working actively to implement tariffs there. Given that China is an important trading partner of Australia, any sign that the US-China trade war might be back could put downward pressure on the AUD.

Trump further tweeted on X that he would impose 100% tariffs on the BRICS countries if they dare to issue a parallel currency that would undermine the US dollar as the leading world currency for trade.

The Aussie Dollar struggles as ANZ, CBA, Westpac, and now National Australia Bank (NAB) all anticipate a 25 basis point (bps) rate cut from the Reserve Bank of Australia (RBA) in February. The NAB had previously forecasted a rate cut in May but has now moved its projection forward to the February RBA meeting.

Easing inflationary pressure toward the end of 2024 has fueled speculation that the Reserve Bank of Australia could consider cutting rates in February. The RBA maintained the Official Cash Rate at 4.35% since November 2023, clearly reiterating that inflation must “sustainably” return to its 2%-3% target range before any policy easing.

Australian Dollar could slide as the mood turns hawkish around Fed

• The US Dollar Index (DXY), an index measuring value of US Dollar against six major currencies, prints above 108.00 as of writing. The US Personal Consumption Expenditures (PCE), Personal Income/Spending, and the Chicago Purchasing Managers’ Index (PMI) is due later today.
• Gross Domestic Product Annualized for Q4 fell to 2.3% from 3.1%, and that missed forecasts of 2.6%. The Department of Commerce also added that Initial Jobless Claims for the week ended January 24 stood at 207K, lower than forecasted at 220K, though it still remained better than last week’s figure of 223K.
• The US Federal Reserve kept its overnight borrowing rate unchanged in the 4.25%-4.50% range at its January meeting on Wednesday, as widely expected. This decision comes after three consecutive rate cuts since September 2024, adding up to a full percentage point.
• The US Dollar strengthened after the Fed adopted a cautious tone. During the press conference, Fed Chair Jerome Powell emphasized that the central bank would need to see “real progress on inflation or some weakness in the labor market” before considering any further adjustments to monetary policy.
• Scott Bessent, who serves as Treasury Secretary under Trump, said that he plans to impose new universal tariffs on imports to the United States, beginning at 2.5%. These tariffs may reach as high as 20%, in keeping with Trump’s belligerent approach to trade policies, in line with his campaign speeches last year.
• Speaking with reporters aboard Air Force One early Tuesday, US President Donald Trump said he “wants tariffs ‘much bigger’ than 2.5%,” as Treasury Secretary Scott Bessent proposed. But he hasn’t settled on the specific tariff levels.
• The Reserve Bank of Australia has recently released its January 2025 Bulletin. It elaborates in detail on how monetary policy changes influence interest rates in the economy and how interest rate fluctuations impact economic activity and inflation.
• Australia’s CPI increased by 0.2% quarter-on-quarter in Q4 2024, the same as in Q3 but below the market consensus of 0.3%. On an annual basis, CPI inflation eased to 2.4% in Q4 from 2.8% in Q3, also below the consensus forecast of 2.5%.
• Australia’s Monthly CPI for December 2024 had increased by 2.5% year over year, meeting forecasts and more than November’s 2.3%. The reading was the highest since August but still was within the target range of the Reserve Bank of Australia (RBA) between 2% and 3% for the fourth consecutive month. The RBA’s Trimmed Mean CPI increased by 3.2% YoY, the slowest pace in three years and a bit short of the 3.3% expected, yet above the central bank’s target range.
• Australian Treasurer Jim Chalmers said in remarks Wednesday, “the worst of the inflation challenge is well and truly behind us.” Chalmers added that “the soft landing we have been planning and preparing for is looking more and more likely,” Reuters reported.
• The AUD also faced challenges amid increased risk aversion due to tariff threats made by US President Donald Trump. President Trump announced plans on Monday evening to impose tariffs on imports of computer chips, pharmaceuticals, steel, aluminum, and copper. The goal is to shift production to the United States (US) and bolster domestic manufacturing.

Technical Analysis: Australian Dollar falls towards 0.6200 in the descending channel

• AUD/USD falls around 0.6210 on Friday, trading in the shape of the falling channel pattern on the daily chart under a bearish bias. Further, the 14-day RSI is below the 50 mark, further affirming the downward momentum.
• The AUD/USD pair could reach the lower boundary of the descending channel at 0.6170 level, then 0.6131—the lowest level since April 2020—on January 13.
• Resistance on the upside is at the nine-day EMA at 0.6240, aligned with the upper boundary of the descending channel.

What key factors drive the Australian Dollar?

Of these, the Reserve Bank of Australia’s interest rates are probably the most important factors for the AUD. Because of its rich resource base, the price of Iron Ore, the country’s biggest export, is another important factor. The state of the Chinese economy, Australia’s largest trading partner, plus inflation in Australia, its growth rate and its Trade Balance also play a part. 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 other factor influencing the value of the Australian Dollar is the Trade Balance, which represents the difference between what a country earns from its exports versus what it pays for its imports. So, if Australia produces highly sought-after exports, then purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase its imports, its currency will gain in value. In addition, progress in prop firm tech can have effects on trading efficiency and market dynamics, thereby driving currency movements.