Market Data 
- AUD/USD may lose its ground amid the Federal Reserve’s cautious policy outlook.
- The Fed kept interest rates unchanged at 4.25%–4.50%, while highlighting increasing risks tied to both inflation and unemployment.
- The Australian Dollar may receive support from optimism over a possible breakthrough in US-China trade relations.
The AUD/USD pair edges higher in Thursday’s Asian session, trading around 0.6440 after falling over 1% in the previous session. The pair had previously touched a five-month high of 0.6514 on Wednesday, but retreated amid Federal Reserve’s (Fed) cautious policy outlook. As expected, the Fed held interest rates steady at 4.25%–4.50%, but its statement acknowledged growing risks related to inflation and unemployment, injecting fresh uncertainty into markets.
Market sentiment took a further hit following Fed Chair Jerome Powell’s press conference, where he noted that US trade tariffs could obstruct the Fed’s objectives for inflation and employment in 2025. Powell indicated that persistent policy instability may force the Fed to adopt a more patient, ‘wait-and-see’ stance on future rate adjustments. While tariffs under the Trump administration had previously dampened consumer and business confidence, the absence of significantly weak economic data makes it harder for the Fed to justify near-term policy changes.
The Fed’s statement reinforced a data-dependent approach, citing inflation as “somewhat elevated” and pointing to increased risks on both the inflation and employment fronts. This cautious outlook, alongside the continuation of the Fed’s balance sheet reduction, has bolstered the US Dollar (USD), pressuring the AUD/USD pair.
Additional pressure on the AUD/USD pair came from US Dollar (USD) strength amid news that US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer will meet Chinese Vice Premier He Lifeng in Geneva this weekend—the first high-level US-China talks since the tariff-driven trade dispute escalated.
Despite the pullback, the Australian Dollar (AUD) remains supported by optimism over a possible breakthrough in US-China trade relations, given Australia’s significant trade ties with China. Further buoying sentiment, the People’s Bank of China announced plans to lower key lending rates and reduce banks’ reserve requirements to spur economic growth.
The Ai Group Industry Index improved in April, it marked the 33rd consecutive month of contraction. Manufacturing, particularly in export-reliant sectors. These developments have strengthened market expectations that the Reserve Bank of Australia (RBA) may cut its cash rate by 25 basis points to 3.85% later this month.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
