AUD/USD falls with local inflation figures on the watch
- Aussie pair falls 0.80% to 0.6245 on Tuesday, testing 0.6250 support.
- Trump’s universal tariff plan on Colombia rattles markets, fueling risk aversion.
- Fed set to hold rates at 4.25%-4.50% on Wednesday; investors eye forward guidance.
- Australia’s Q4 CPI in focus with subdued inflation likely to bolster RBA rate cut bets.
AUD/USD extends its losing streak near 0.6250 as US President Trump’s proposed incremental tariffs on Colombia heighten trade war anxieties. The Federal Reserve (Fed) is widely expected to keep its benchmark rate steady midweek, although markets remain on edge about the central bank’s policy stance amid Trump’s push for immediate cuts. Meanwhile, the Aussie struggles under persistent speculation of RBA easing, and a moderate US Dollar recovery in the face of deepening risk-off sentiment.
Daily digest market movers: Aussie fell as the US Dollar recovered on a sour market mood
- President Trump endorsed a universal 2.5% levy on Colombia, which could climb monthly up to 20%. Investors see the plan as granting leverage in potential renegotiations, hence the rise in safe-haven demand for the Greenback.
- Sentiment soured further after China’s DeepSeek demonstrated affordable AI success, spurring a tech sector shakeout and driving up USD’s safe-haven appeal.
- Fed decision on deck as it is set to leave rates at 4.25%-4.50% on Wednesday. Traders will comb through policymakers’ remarks, especially given Trump’s calls for quick rate cuts.
- Australia’s CPI will be pivotal as the fourth-quarter inflation is seen slowing to 2.5% YoY (from 2.8%), whereas quarterly CPI growth could rise to 0.3% (versus Q3’s 0.2%). A weak figure might amplify chatter of the RBA unwinding its restrictive policy in February.
- Domestically, the RBA remains poised for a potential February rate cut if inflation persists below target and the economy fails to pick up steam.
AUD/USD technical outlook: Indicators diverge in a narrow trading range
The AUD/USD declined to 0.6245 on Tuesday, hovering within a tight 0.6230-0.6300 corridor. Technical cues are mixed: the Moving Average Convergence Divergence (MACD) histogram displays rising green bars, hinting at underlying bullish pressure.
Yet the Relative Strength Index (RSI) stands at 49 in negative territory, down sharply — signaling an ongoing lack of conviction. This mismatch underscores market indecision with traders awaiting pivotal data releases (the Fed’s policy decision and Australia’s CPI) for clearer direction before adopting more aggressive positions.
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.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
