Australian Dollar strengthens as markets digest US-China trade progress and await key inflation data.
The Australian Dollar (AUD) continued its rebound against the US Dollar (USD) on Tuesday, gaining ground for the second straight session. The AUDUSD pair showed resilience even as broader markets navigated mixed signals from central banks and fresh developments on the trade front. At the core of the AUD’s strength lies a growing sense of optimism following a tentative trade truce between the US and China and a better-than-expected consumer confidence report out of Australia. However, all eyes are now on the upcoming US Consumer Price Index (CPI) report, which could redefine expectations for the Federal Reserve’s rate outlook.
Consumer Confidence Rebounds in Australia
Australia’s Westpac Consumer Confidence Index recorded a 2.2% month-on-month rise in May, climbing to 92.1 and recovering from a steep 6.0% drop in April. This marks the third monthly increase in 2025 and suggests that sentiment among households is stabilizing after a prolonged period of pessimism. The index, however, still remains below the 100 neutral level, indicating a cautious outlook among consumers. Nonetheless, the latest improvement provided a psychological boost to the Australian Dollar, especially as markets digested trade news that could improve Australia’s external economic prospects.
AUD Sensitive to Trade Developments
Australia, with its deep economic and trade ties to China, remains highly sensitive to geopolitical developments—especially those involving its largest trading partner. The latest breakthrough between the US and China offered a reprieve for global markets and directly benefited trade-exposed currencies like the Australian Dollar. Following weekend talks in Switzerland, both nations agreed to substantially reduce tariffs. The US will lower tariffs on Chinese goods from 145% to 30%, while China will reduce duties on US imports from 125% to just 10%. While the agreement remains preliminary, it has been hailed as a turning point in trade relations.
Greer Warns Tariffs Could Return
US Trade Representative Jamieson Greer, while optimistic about the new trade arrangement, noted that the tariffs could “go back up” if negotiations falter. This warning introduces an element of risk, keeping traders cautious as they assess the likelihood of long-term peace between the world’s two largest economies. The conditional nature of the agreement means that markets are not out of the woods yet, and risk-sensitive assets like the AUD remain prone to volatility driven by trade headlines.
US Dollar Pulls Back as Traders Await CPI
The US Dollar Index (DXY), which tracks the greenback against a basket of six major currencies, traded lower around 101.60 in anticipation of key inflation data. The pullback in the USD offered additional breathing room for the AUDUSD pair to recover. Traders are closely watching the US April CPI report, scheduled for release later on Tuesday. Headline inflation is expected to rebound to 0.3% month-on-month from a previous -0.1%, while core CPI is also forecast to rise to 0.3% from 0.1%. Year-on-year readings are projected to remain unchanged.
CPI Report Could Shift Fed Policy Expectations
With the Federal Reserve maintaining its policy rate in the 4.25%–4.50% range last week, the inflation report could be a decisive factor in shaping expectations for future rate moves. Fed Chair Jerome Powell highlighted ongoing concerns over inflation and rising unemployment, stating that persistent trade uncertainty could complicate the central bank’s ability to achieve its dual mandate. Should CPI data come in stronger than anticipated, the Fed could be forced to maintain a hawkish stance, placing pressure on risk assets including the Australian Dollar.
Fed Adopts Wait-and-See Approach
Following its May policy meeting, the Federal Reserve signaled a more cautious stance, with Powell acknowledging that economic crosscurrents—including tariffs and labor market fragility—warrant a patient approach. Markets have since scaled back bets on near-term rate hikes, though expectations remain fluid pending the outcome of key inflation metrics. Any upside surprise in CPI could revive speculation about further tightening, potentially lifting the US Dollar and capping AUDUSD gains.
China Inflation Continues to Falter
Data from the National Bureau of Statistics revealed that China’s Consumer Price Index (CPI) fell for the third straight month in April, declining 0.1% year-on-year. This matched both market expectations and the previous month’s figure. Additionally, the Producer Price Index (PPI) contracted 2.7% YoY, deeper than March’s 2.5% decline and more than the expected 2.6% drop. The deflationary trend highlights lingering demand-side weaknesses in China’s economy, which could have indirect implications for Australia’s export sector.
China Posts Stronger Trade Surplus
Despite inflationary weakness, China’s external trade remained robust. The country posted a trade surplus of $96.18 billion in April, outperforming forecasts of $89 billion. Exports rose by a strong 8.1% year-on-year, well above the anticipated 1.9%, although down from March’s 12.4% surge. Imports dipped just 0.2% YoY, a significantly milder decline than the projected -5.9%. These figures underscore the resilience of Chinese outbound trade, providing a positive signal for countries like Australia that rely heavily on commodity exports to China.
Australia’s Trade Challenges Persist
Domestically, Australia’s economic picture remains mixed. The Ai Group Industry Index for April showed slight improvement but still signaled ongoing contraction, marking the 33rd consecutive month of downturn, especially in export-reliant manufacturing sectors. The sluggish performance of the industrial sector continues to weigh on broader economic growth, reinforcing expectations that the Reserve Bank of Australia (RBA) may need to provide additional policy support.
RBA Seen Cutting Rates, But Path Less Aggressive
While markets continue to price in a 25 basis point rate cut from the RBA later this month—likely bringing the cash rate to 3.85%—expectations for deeper cuts have moderated. Earlier forecasts had predicted rates could fall to 2.85% by year-end, but those projections have been revised upward to around 3.10% amid stronger-than-expected consumer resilience and improved global trade sentiment. Still, persistent manufacturing weakness and cautious business investment suggest the RBA may retain a dovish tone going forward.