The Australian Dollar (AUD) is facing notable weakness as it trades lower against the US Dollar (USD), with the AUD/USD pair slipping by 0.1% to hover around 0.6220 during European trading hours on Tuesday. This movement comes as the US Dollar continues to extend its downside, pressured by increasing speculation that the Federal Reserve (Fed) might restart its monetary expansion cycle in June. The US Dollar Index (DXY) has revisited an 11-week low of 106.15, reflecting growing concerns about economic slowdown amid escalating trade tensions between the United States and China.
The announcement by US President Donald Trump of additional 10% tariffs on China has exerted substantial selling pressure on the Australian Dollar. This development has reignited fears of a trade war between the world's two largest economies, potentially disrupting global supply chains and affecting the economic landscape worldwide. The US-China trade conflict appears set to resume where it was left, with both nations adopting tit-for-tat policies that could have far-reaching implications for international markets.
Meanwhile, the likelihood of the Fed reducing interest rates in June has seen a significant increase. According to the CME FedWatch tool, there is now an 87% chance of a rate cut, up from 69% recorded just a week ago. This shift in market expectations has contributed to the selling-off of the US Dollar, as investors brace for potential changes in monetary policy aimed at addressing economic slowdown concerns.
Despite the pressure on the AUD/USD pair, it continues to hold above the key support level of 0.6200. This level has proven critical in maintaining some semblance of stability for the Australian Dollar amid the current market volatility. The pair's slight decline has not overshadowed its previous strength against the US Dollar, which had been evident before recent developments.
The backdrop to these currency movements is the US-China Phase One trade deal signed in January 2020. The agreement was intended to bring stability and trust between the two nations, requiring structural reforms and changes to China's economic and trade regime. However, with new tariffs and renewed tensions, the intended benefits of the deal are being called into question.
As trade tensions escalate, fears of an economic slowdown have led to a sell-off in the US Dollar. Despite these challenges, the AUD/USD pair has managed to benefit from this situation, albeit slightly. The complex interplay between trade policies and monetary expectations continues to shape currency markets, leaving traders and analysts closely monitoring developments for further cues.