The Australian Dollar (AUD) strengthened for a second consecutive session on Tuesday, recovering ground against the U.S. Dollar (USD) as AUD/USD hovered near 0.6370. The rebound was partially supported by a modest recovery in domestic sentiment and softer USD performance. However, technical resistance and lingering economic uncertainties continue to cap further upside.
Australia’s Westpac Consumer Confidence Index rose 2.2% month-on-month to 92.1 in May, reversing last month’s 6.0% decline and marking the index’s third increase this year. The uptick in consumer morale lent modest support to the Aussie, although broader market dynamics played a larger role in shaping price action.
The U.S. Dollar, meanwhile, retreated slightly as markets digested the implications of a preliminary trade deal between the U.S. and China. The agreement, forged during talks over the weekend in Switzerland, includes significant tariff rollbacks: the U.S. will reduce levies on Chinese imports from 145% to 30%, while China will cut tariffs on U.S. goods from 125% to 10%. The breakthrough was hailed by officials from both countries as a constructive step toward de-escalating trade tensions.
Australia, with its deep economic ties to China, is highly sensitive to shifts in the global trade environment. The easing of trade frictions has tempered expectations for aggressive monetary easing by the Reserve Bank of Australia (RBA). Markets now anticipate the RBA to lower its cash rate to 3.1% by year-end—up from earlier estimates of 2.85%—though a 25 basis point cut is still widely expected at the central bank‘s upcoming meeting.
Additional headwinds for the U.S. Dollar came from investor caution ahead of the U.S. Consumer Price Index (CPI) report for April, due later on Tuesday. Analysts expect headline CPI to rise 0.3% month-over-month following a 0.1% decline, with core inflation also seen increasing by 0.3%. Annual readings for both metrics are projected to remain unchanged.
Despite the upbeat trade sentiment, the Fed’s recent tone added uncertainty. While the Federal Reserve held rates steady at 4.25%–4.50% last week, Chair Jerome Powell emphasized inflation and unemployment risks, noting that persistent tariff volatility could complicate future policy decisions.
Meanwhile, China’s inflation data released over the weekend added to concerns about domestic demand in Australia’s top trading partner. China’s CPI fell 0.1% year-over-year for a third straight month in April, while the Producer Price Index (PPI) slid 2.7%, a steeper-than-expected drop. Still, China’s trade surplus narrowed to $96.18 billion in April, with exports outperforming forecasts, rising 8.1% year-over-year.
On the domestic front, Australia’s Ai Group Industry Index improved modestly in April but extended its record streak of monthly contraction to 33 months, driven largely by weakness in export-dependent manufacturing sectors. This persistent softness reinforces the case for the RBA’s expected rate cut this month.
AUD/USD Outlook Remains Bearish Despite Short-Term Recovery
Technically, AUD/USD remains under pressure despite the short-term bounce. The pair is trading below its nine-day Exponential Moving Average (EMA), currently near 0.6402, with the 14-day Relative Strength Index (RSI) below 50—both indicators pointing to a prevailing bearish trend.
Immediate support lies at the 50-day EMA around 0.6344. A decisive break below this level could accelerate selling momentum toward 0.5914, a low not seen since March 2020. On the upside, resistance is found at the 0.6400 handle, followed by a potential retest of the six-month high at 0.6515. A sustained move beyond this level could open the path toward the seven-month high of 0.6687 set in November 2024.
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