AUD/USD trades indecisively around 0.6300 after soft Aussie inflation data
- AUD/USD struggles for direction around 0.6300 after the release of the soft Aussie Monthly CPI data for February.
- Tax cuts and additional energy bill relief by the Australian government in the fiscal budget could be inflationary for the economy.
- The market sentiment remains cautious as US President trump is set to announce reciprocal tariffs on April 2.
The AUD/USD pair exhibits indecisiveness around 0.6300 during North American trading hours on Wednesday. The Aussie pair struggles for the direction after the release of the Australian Monthly Consumer Price Index (CPI) data for February, which showed that inflation cools down.
The inflation data rose at a slower pace of 2.3%, compared to estimates and January’s reading of 2.5%. Technically, soft inflation data should have boosted market expectations that the Reserve Bank of Australia (RBA) could cut interest rates again in the April meeting. However, traders would also discount the expansionary fiscal budget unveiled by Treasurer Jim Chalmers on Tuesday, which is expected to be inflationary for the Australian economy.
The major highlight of the budget was a progressive reduction in personal taxes for individuals’ earnings between $18,201 and $45,000 for the next three years. The administration announced additional $1.8 billion in energy bill relief, supporting households against high inflation.
In the February meeting, the RBA reduced its Official Cash rate (OCR) by 25 basis points (bps) to 4.10%, and RBA Governor Michele Bullock guided a ‘gradual and cautious’ monetary policy easing in the February policy meeting.
Meanwhile, the US Dollar (USD) ticks higher but trades in a limited range amid uncertainty over how tariffs by United States (US) President Donald Trump will shape the domestic outlook. Trump is poised to unveil reciprocal tariffs on April 2. However, he has indicated that a few nations could get tariff breaks.
On the economic data front, investors await the US Personal Consumption Expenditure Price Index (PCE) data for February, which will be released on Friday. Economists expect the US core PCE inflation, which is the Federal Reserve’s (Fed) preferred inflation gauge, to have grown at a faster pace of 2.7% year-on-year, compared to the 2.6% increase seen in January.
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.