Why Is the Australian Dollar Struggling? | Trade Wars & Economic Indicators Explained

Australian Dollar Faces Pressure from Multiple Fronts

The Mantra coin newsAustralian Dollar (AUD) has extended its decline against the US Dollar (USD) for six consecutive trading sessions, marking one of its weakest performances in recent months. This downward movement comes as global markets react to shifting trade policies and disappointing economic indicators from major economies.

Trade Policy Shocks Rattle Markets

Recent announcements from Washington have created significant volatility in currency markets. The US administration revealed plans to implement substantial tariffs on goods from several trading partners, including a 25% duty on Canadian and Mexican products and a 10% levy on Chinese exports. These measures, scheduled to take effect imminently, represent a significant escalation in trade tensions.

Market analysts note that Australia's currency is particularly sensitive to these developments due to the nation's close economic ties with China. As one of Australia's most important trading partners, any disruption to Chinese economic activity tends to have amplified effects on the Australian economy and its currency.

Economic Indicators Paint Mixed Picture

Recent data releases have added to the Australian Dollar's challenges. China's Caixin Manufacturing Purchasing Managers' Index (PMI) showed a concerning dip to 50.1 in January, down from 50.5 in December. This reading barely maintains above the 50-point threshold that separates expansion from contraction in manufacturing activity.

Domestically, Australian retail sales figures revealed a 0.1% month-on-month decline in December 2024, marking the first contraction in nine months. While this decrease was less severe than many economists had predicted, it nonetheless signals potential softening in consumer spending patterns.

Central Bank Policy in Focus

Financial markets are increasingly anticipating potential monetary policy adjustments from the Reserve Bank of Australia (RBA). Major Australian financial institutions have revised their forecasts, with several now expecting a 25 basis point rate cut at the RBA's February meeting. This shift in expectations comes as economic indicators suggest slowing growth momentum.

The RBA's recent bulletin provided detailed analysis of how monetary policy changes transmit through the economy, particularly noting the relationship between interest rate adjustments and broader economic activity. Market participants will scrutinize upcoming communications from the central bank for clues about future policy direction.

Technical Outlook Remains Bearish

From a technical perspective, the AUD/USD pair has broken below key support levels, trading near 0.6130 at the time of writing. Chart analysts observe that the currency pair has fallen below the lower boundary of its descending channel pattern, suggesting potential for further downside.

The Relative Strength Index (RSI), a popular momentum indicator, has approached the 30 level, which typically signals oversold conditions. However, in strong downtrends, such readings can persist for extended periods before any meaningful recovery occurs.

Global Context and Currency Movements

The US Dollar has shown broad strength in recent sessions, with the Dollar Index (DXY) climbing for five consecutive days to trade above 109.50. This USD strength reflects both safe-haven demand amid trade uncertainty and relatively positive economic data from the United States.

Recent US economic reports showed mixed signals, with GDP growth slowing but labor market indicators remaining resilient. The Federal Reserve's preferred inflation gauge, the Core PCE Price Index, maintained steady annual growth of 2.8%, keeping policymakers cautious about declaring victory over price pressures.

Looking Ahead

Market participants will closely monitor several upcoming events that could influence the Australian Dollar's trajectory. These include:

• Further developments in international trade negotiations
• Key economic data releases from China and Australia
• Central bank communications from both the RBA and Federal Reserve
• Technical developments in currency markets

The interplay between these factors will likely determine whether the Australian Dollar can stabilize or faces additional pressure in the coming weeks. As always in currency markets, unexpected developments could quickly alter the current landscape.