The Australian Dollar (AUD) has been experiencing a downward slide against the US Dollar (USD), driven by a combination of international trade tensions and economic uncertainties. The AUD/USD pair has notably dropped to its lowest in a week, reaching the 0.6225 area, amid US President Donald Trump's aggressive trade policies and expectations surrounding the Federal Reserve's monetary actions. As the focus shifts to the Federal Open Market Committee (FOMC) decision, market analysts are keenly observing oscillators that suggest further downside risks for the currency pair.
The recent decline in the AUD/USD pair can be attributed to multiple global economic factors. President Trump's threats to impose 25% tariffs on imports from nations such as Mexico, Canada, China, and the European Union have heightened trade war fears. These concerns have been exacerbated by China's economic struggles, further pressuring the Australian Dollar. The financial markets are bracing for the Federal Reserve's upcoming decision on borrowing costs, which has already led to a decline in US Treasury bond yields and weighed heavily on the USD.
China's recent economic data has added to the market's apprehensions. The official Purchasing Managers' Indexes (PMI) indicated a contraction in manufacturing activity and a slowdown in non-manufacturing growth for January. This unexpected downturn in China's economy, coupled with trade tensions, has intensified the downward momentum of the AUD/USD pair.
As investors await the FOMC meeting, particular attention will be paid to the accompanying policy statement and Fed Chair Jerome Powell's remarks during the post-meeting press conference. These insights are expected to provide clarity on future monetary policy directions. Meanwhile, technical indicators, such as oscillators on the daily chart, have started gaining negative traction, signaling that bearish trends may continue to dominate the AUD/USD pair.
The pair's recent rejection near the 50-day Simple Moving Average (SMA) and the 50% Fibonacci retracement level of its late November-January downfall have emboldened bearish traders. The AUD/USD pair has extended its slide from around the 0.6330 region, marking its highest level since December 18. This marks the third consecutive day of decline for the pair.
Domestic economic indicators in Australia have also contributed to the weakening of the Australian Dollar. The softer Q4 Consumer Price Index (CPI) print has intensified speculation about a potential rate cut by the Reserve Bank of Australia (RBA) in February. The trimmed mean—a crucial measure of core inflation—rose by only 0.5% last quarter, marking the smallest increase since mid-2021. This has led to an 80% probability that the RBA will reduce the cash rate by a quarter basis point at its policy meeting on February 18.
The cautionary mood in global markets and renewed demand for the US Dollar have further dragged down the AUD/USD pair ahead of crucial events such as Bank of England Governor Bailey's testimony and the Fed policy decision. Additionally, Australia is set to release fresh inflation-related data on Wednesday, which is expected to show that price pressures eased further at the end of 2024. This development could further reinforce expectations for an RBA interest rate cut next month.