The Australian Dollar (AUD) weakened against the US Dollar (USD) in Tuesday’s Asian session, slipping after a solid gain of more than 0.50% the previous day. The decline follows an interest rate cut by the People’s Bank of China (PBoC), reigniting concerns over China’s economic momentum—a key factor influencing the Aussie due to Australia’s strong trade ties with China.
The PBoC trimmed its Loan Prime Rates (LPRs), reducing the one-year rate from 3.10% to 3.00% and the five-year from 3.60% to 3.50%. The easing move is intended to support China’s faltering economy but has weighed on the risk-sensitive Australian Dollar amid growing doubts about sustained Chinese demand for Australian exports.
Australian Politics Add to Pressure on the Aussie
Further dragging on sentiment, Australia faces escalating political uncertainty. The National Party’s withdrawal from its alliance with the Liberal Party has fractured the opposition coalition, while the ruling Labor Party has consolidated power with a broader mandate. The resulting political instability has added to the pressure on the AUD.
Markets now await the Reserve Bank of Australia’s (RBA) interest rate decision later on Tuesday, with expectations centered on a 25 basis point cut. Despite robust domestic employment data released last week, including an 89,000 surge in jobs in April and a steady unemployment rate of 4.1%, analysts believe the RBA may act to support broader economic stability.
AUD/USD Softens Despite USD Weakness
The Aussie Dollar’s drop comes despite weakness in the US Dollar following a downgrade of the US credit rating by Moody’s Ratings from Aaa to Aa1. This move mirrors downgrades from Fitch in 2023 and S&P in 2011 and reflects growing concerns about the United States’ fiscal path. Moody’s projects federal debt to rise to 134% of GDP by 2035, from 98% in 2023, while the federal deficit could expand to nearly 9% of GDP.
These concerns, alongside signs of easing inflation—highlighted by last week’s lower Consumer Price Index (CPI) and Producer Price Index (PPI) data—have fueled expectations for further Federal Reserve rate cuts in 2025. Disappointing US Retail Sales figures have also intensified fears of prolonged economic sluggishness, keeping the US Dollar under pressure.
Geopolitical and Trade Developments in Focus
The AUD had initially gained support from optimism surrounding a 90-day US-China trade truce and the possibility of further trade agreements. However, renewed tensions emerged after the Trump administration signaled intentions to impose tariffs on uncooperative trade partners and expand export restrictions on Chinese semiconductor firms, potentially undermining the fragile truce.
Adding to market caution, China’s economic data released Monday showed mixed results: Retail Sales rose 5.1% year-over-year in April, below the 5.5% forecast, while Industrial Production grew 6.1%, beating expectations but slowing from March’s 7.7%.
Technical Outlook: AUD/USD Tests Key Support
At the time of writing, AUD/USD hovers near 0.6450. Technically, the pair maintains a bullish tone as it trades above the nine-day Exponential Moving Average (EMA) at 0.6429, with the 14-day Relative Strength Index (RSI) holding above the neutral 50 level.
Immediate resistance lies at the six-month high of 0.6515 set on December 2, 2024. A decisive break above this could open the path to the November 2024 peak at 0.6687. On the downside, failure to hold above the nine-day EMA could lead to a drop toward the 50-day EMA at 0.6363, and a break below that would risk a deeper pullback toward the key support zone near 0.5914—the March 2020 low.
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