The Australian Dollar (AUD) faced renewed selling pressure on Friday, extending losses for a second consecutive session after hitting an eight-month high of 0.6625. Investors pulled back from the Aussie as the US Dollar (USD) advanced, driven by global trade uncertainty, hawkish Federal Reserve signals, and anticipation of key US economic data.
Australian Dollar Slips as Risk Sentiment Cools
The AUDUSD pair fell back below the 0.6600 handle during Friday’s early European session, marking a notable reversal from its recent bullish run. The pullback comes as markets weigh the implications of intensifying trade developments between the US and major partners like China, the EU, and Japan.
Australia, being heavily dependent on commodity exports and trade with China, is especially vulnerable to geopolitical disruptions. The upcoming US-China trade talks scheduled to take place in Stockholm next week are being closely watched by currency traders.
US Dollar Index Extends Gains Ahead of Durable Goods Data
The US Dollar Index (DXY) rose to around 97.60, marking its second straight day of gains. Strength in the greenback was largely driven by investor caution surrounding upcoming trade announcements and central bank policy signals.
Attention now shifts to US Durable Goods Orders data for June, a key indicator of manufacturing sector strength. A better-than-expected reading could reinforce bullish momentum in the USD, further pressuring Australian Dollar.
RBA Bullock Reaffirms Inflation Focus, But Global Uncertainty Lingers
In Sydney, RBA Governor Michele Bullock reiterated her commitment to bringing inflation back to the central bank’s 2–3% target. Speaking at the Anika Foundation event, Bullock acknowledged progress but stressed that uncertainty remains high amid global economic headwinds.
She emphasized that interest rate decisions will remain data-dependent, adding that the RBA is committed to a cautious and flexible approach. This aligns with the tone in the recent RBA meeting minutes, which highlighted internal debates on whether to ease policy further.
US Fed Officials Signal Diverging Views on Policy Path
While the RBA treads cautiously, the Federal Reserve continues to send mixed policy signals, influencing the direction of USD crosses.
Fed Governor Adriana Kugler maintained a hawkish stance, stating that no immediate rate cuts are warranted due to persistent inflation risks fueled by the Trump administration’s tariff measures.
On the flip side, Fed Governor Christopher Waller expressed concern over potential economic downturns and called for a rate cut at the July meeting, suggesting that delayed action could lead to more aggressive easing later.
San Francisco Fed President Mary Daly struck a middle ground, labeling two cuts in 2025 as a “reasonable outlook,” but warned against procrastination in adjusting rates.
This divergence among Fed policymakers introduces further volatility into currency markets, especially for high-beta currencies like the AUD, which are sensitive to global risk appetite.
Trump Administration Intensifies Tariff Announcements
Trade tensions ratcheted up this week after President Donald Trump announced a 15% tariff on Japanese exports to the US. In exchange, Japan agreed to invest $550 billion in American infrastructure and open its markets to US agricultural products and energy.
Moreover, the US and EU are reportedly close to finalizing a deal that would impose similar 15% tariffs on EU goods, according to the Financial Times. These moves are likely to ripple across global supply chains and hit export-reliant economies like Australia indirectly, by reducing global trade flows and demand for commodities.
US-China Talks Could Decide Australian Dollar Next Move
US Treasury Secretary Scott Bessent’s meeting with Chinese officials in Stockholm next week represents a critical flashpoint. Traders are hoping for constructive dialogue that could ease tensions between the two largest economies.
Australia, which counts China as its largest trading partner, is particularly sensitive to any deterioration or improvement in US-China relations. A failure to make progress could reignite fears of a global slowdown, pressuring the AUD further.
Australia’s PMI Data Shows Resilience
Despite external risks, Australian domestic data offered some encouragement. The Composite PMI, released jointly by Judo Bank and S&P Global, rose to 53.6 in July from 51.6 in June, signaling the fastest pace of growth since April 2022.
Services PMI jumped to 53.8, the highest in 16 months.
Manufacturing PMI climbed to 51.6, reflecting renewed demand and stronger new orders.
The PMI report highlighted the broad-based expansion in private sector activity and marked the tenth consecutive month of growth. This resilience may allow the RBA to delay further rate cuts, supporting the Aussie in the medium term.
RBA Minutes Suggest a Gradual Approach to Easing
The RBA Meeting Minutes released earlier this week confirmed that policymakers are in no rush to cut rates aggressively. While members acknowledged that additional easing is likely, they preferred to wait for clearer evidence of inflation cooling.
Crucially, the board felt that cutting rates three times in four meetings would not align with their “cautious and gradual” stance. This approach signals that any downward rate path will be measured, barring a significant economic shock.
Westpac Leading Index Shows Loss of Momentum
On a more concerning note, Westpac’s Leading Index showed a decline in momentum, with the six-month annualized growth rate falling to 0.03% in June from 0.11% in May.
The slowdown is being driven by:
- Weakening commodity prices.
- Waning consumer sentiment.
- Reduced average hours worked.
These indicators suggest that despite strong PMI prints, the underlying forward-looking economic momentum is softening, which could eventually prompt the RBA to shift its stance more dovishly if inflation also cools.
AUDUSD Faces Key Tests Ahead
The AUDUSD outlook remains mixed. Bullish domestic data and cautious RBA signals offer some underlying support for the Aussie. However, this may not be enough to counteract:
Rising US Dollar strength.
Hawkish Fed commentary.
Worsening global trade tensions.
The near-term trajectory of AUDUSD will likely hinge on:
US Durable Goods Orders data.
The tone and outcome of the US-China trade talks in Stockholm.
Any surprise remarks from Fed or RBA officials in upcoming speeches.
Technical Outlook: Support Near 0.6550, Resistance at 0.6625
From a technical perspective, AUD/USD faces initial support at 0.6550, followed by stronger levels around 0.6520, where buying interest could emerge. Resistance sits near 0.6625, the recent eight-month high, with a breakout above that level opening the door toward 0.6680.
A close below 0.6550 could trigger a deeper correction toward the 0.6480 zone, especially if US macro data surprises to the upside.
Conclusion
The Australian Dollar’s recent pullback underscores the fragile balance between domestic strength and external vulnerabilities. While Australia’s economy shows signs of resilience through robust PMI figures, the external environment dominated by US trade policy, Fed rate expectations, and global risk sentiment is keeping the Aussie under pressure.
Investors will need to monitor trade headlines, Fed developments, and incoming data to gauge whether the AUD can recover recent losses or remains on the defensive in the sessions ahead.
Disclaimer: This blog is for informational purposes only and does not constitute financial advice. Always conduct your own research and consult a professional advisor before making investment decisions.
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