US China Dialogue Progresses, But Australian Dollar Dips.
The Australian Dollar (AUD) weakened against the US Dollar (USD) in early Wednesday trading, despite signs of improving trade relations between the United States and China. The Australian Dollar pair retraced recent gains and slipped toward the 0.6600 handle amid broad-based strength in the US Dollar and softer Australian trade data. This development highlights the complex interplay between geopolitical progress and macroeconomic fundamentals in currency markets.
While the constructive tone in US-China trade talks suggests potential upside for the risk-sensitive Aussie in the medium term, the immediate market reaction has favored the Greenback. A slew of US macroeconomic data, central bank rhetoric, and cautious sentiment ahead of key inflation figures kept the USD supported, exerting downward pressure on the AUD.
Lutnick Hails Framework for Geneva Consensus
In a potentially market-moving announcement, US Commerce Secretary Howard Lutnick confirmed that both Washington and Beijing had reached a preliminary framework to implement the Geneva Consensus—a set of agreements designed to de-escalate trade tensions and resolve long-standing disputes over rare earth minerals, tariffs, and intellectual property protections.
Speaking to Bloomberg, Lutnick stated that the agreement still awaits final approval from US President Donald Trump but characterized the discussions as “substantive and forward-looking.” His comments were reinforced by China’s Vice Commerce Minister Li Chenggang, who noted that talks with US officials had been “rational and candid,” marking a departure from the acrimonious tone that dominated bilateral discussions over the past few years.
US Dollar Rises as Markets Focus on Inflation, Labor Data
Despite the diplomatic breakthrough, the US Dollar continued to strengthen. The US Dollar Index (DXY) climbed for the second consecutive day, hovering near 99.10 during the Asian session. The momentum in the Greenback reflects renewed confidence in the US economy following a batch of better-than-expected labor market data and a growing belief that inflation remains sticky enough to keep interest rates elevated in the short term.
Markets are now keenly awaiting the May Consumer Price Index (CPI) report, which is expected to show a year-over-year increase of 2.5%. While that would be well within the Federal Reserve’s tolerance range, a hotter-than-expected print could reignite expectations for rate hikes or, at the very least, delay rate cuts—further supporting the USD.
Nonfarm Payrolls Surprise to the Upside
The US Bureau of Labor Statistics (BLS) reported that Nonfarm Payrolls (NFP) increased by 139,000 in May—beating market forecasts of 130,000, though below the upwardly revised April figure of 147,000. The Unemployment Rate held steady at 4.2%, while Average Hourly Earnings came in flat at 3.9% YoY, both outperforming expectations.
This data painted a picture of a resilient labor market and gave investors more confidence in the Federal Reserve’s hawkish stance. With the Fed reiterating a data-dependent approach, the relatively firm employment data supports the argument for keeping interest rates on hold in the upcoming July policy meeting.
Trump Turns Up the Heat on the Fed
In an aggressive post on Truth Social, President Donald Trump criticized Fed Chair Jerome Powell, calling on him to slash interest rates in response to global monetary easing. Trump referenced recent European Central Bank moves and pressured the Fed to act swiftly.
“ADP NUMBER OUT!!! ‘Too Late’ Powell must now LOWER THE RATE. He is unbelievable!!! Europe has lowered NINE TIMES,” Trump wrote, adding a political twist to the already complex monetary landscape.
The Federal Reserve has thus far remained resistant to political pressure, maintaining that decisions will be guided solely by economic data. However, with the 2024 election still fresh in the market’s memory, the Fed may find itself under increasing scrutiny as it balances price stability with political optics.
China’s Inflation and Trade Paint Mixed Picture
From the Chinese side, recent data has been less encouraging. The National Bureau of Statistics (NBS) reported that CPI inflation fell 0.1% YoY in May—unchanged from April and slightly better than market expectations of a 0.2% drop. On a month-over-month basis, CPI declined 0.2% after a 0.1% increase in April.
Meanwhile, China’s Producer Price Index (PPI) dropped 3.3% YoY in May, accelerating from April’s 2.7% decline and reinforcing concerns about deflationary pressures in the industrial sector. This persistent disinflation complicates the outlook for China’s recovery, which in turn affects commodity currencies like the Australian Dollar that are heavily tied to Chinese demand.
On the trade front, China’s Trade Surplus expanded to CNY743.56 billion in May, up from CNY689.99 billion previously. Exports rose by 6.3% YoY, but decelerated from April’s 9.3%. Imports, on the other hand, declined 2.1% after a modest 0.8% gain in the previous month. This drop in imports—particularly for raw materials—hints at softening domestic demand, which could weigh on Australia’s commodity exports.
Australian Trade Data Weighs on the Aussie
Australia’s own trade data failed to provide support for the AUD. The Australian Bureau of Statistics (ABS) reported a trade surplus of AUD 5.41 billion in April, missing market expectations of AUD 6.10 billion and down sharply from March’s revised surplus of AUD 6.89 billion.
The breakdown showed that exports fell by 2.4% MoM, reversing March’s strong 7.2% gain (revised from 7.6%). Meanwhile, imports rose by 1.1%, indicating some resilience in domestic demand but at the cost of narrowing the trade surplus. The weaker export reading, especially against the backdrop of slowing Chinese imports, points to ongoing challenges for Australia’s external sector.
Services Sector in China Shows Modest Growth
One bright spot came from China’s Caixin Services PMI, which edged higher to 51.1 in May from 50.7 in April. This modest expansion indicates that the services sector—less reliant on exports and more tied to domestic consumption—is slowly recovering. While this doesn’t entirely offset the bearish PPI and CPI prints, it may offer a partial cushion for economies with service-related trade exposure, including Australia.
Australian Dollar Outlook: Technical and Fundamental Risks
From a technical standpoint, the AUDUSD pair is trading near a key support zone around 0.6580–0.6600. A break below this area could open the door toward 0.6500, particularly if upcoming US inflation data surprises to the upside or risk sentiment deteriorates.
Fundamentally, however, the longer-term outlook for the Aussie remains dependent on three key factors:
- Progress in US-China Trade Talks – A full implementation of the Geneva Consensus would reduce trade-related risk premia in the Aussie.
- Chinese Economic Momentum – Any sustained recovery in Chinese demand could buoy Australian exports and support the AUD.
- Fed Policy vs. RBA Stance – Diverging interest rate expectations between the Fed and the Reserve Bank of Australia (RBA) will continue to drive relative yields and capital flows.
With volatility likely to remain elevated ahead of major data releases, traders will be closely watching the tone of central bank officials and the evolution of macroeconomic data in both hemispheres.
