The Australian Dollar (AUD) extended its decline against the US Dollar (USD) on Thursday, marking its second consecutive day of losses, as geopolitical tensions and trade uncertainties outweighed support from weaker US inflation data that has heightened expectations of a Federal Reserve rate cut in September.
Despite the broader weakness in the Greenback, the AUD/USD pair failed to capitalize as risk sentiment soured. Investors remained cautious amid escalating global tensions and evolving trade dynamics, especially between the US and China—two economic giants whose actions heavily influence the Australian economy.
Trump Declares China Trade Deal ‘Done’; China Tightens Rare Earth Control
US President Donald Trump took to Truth Social on Wednesday, declaring that a trade agreement with China is “done,” pending final approval from himself and Chinese President Xi Jinping. Trump noted, “We are getting a total of 55% tariffs, China is getting 10%. Relationship is excellent!”
Market participants are wary, however, of the lasting implications such deals may carry. In a related development, China announced it would issue only six-month export licenses for rare-earth materials to US automakers and manufacturers. According to The Wall Street Journal, this move signals China’s intention to retain strategic leverage over critical mineral supplies in future negotiations.
Australia, a close trade partner of China and a major exporter of raw materials, could face indirect fallout from any economic instability or protectionist moves by Beijing.
Geopolitical Risks Escalate in the Middle East
Risk appetite also took a hit following growing tensions between Israel and Iran. The United States has advised some of its citizens to leave the region, with President Trump stating emphatically on Wednesday that Iran “will not be allowed to have a nuclear weapon.” CBS News further reported that US officials were briefed on Israel’s preparedness for a potential military operation into Iran.
Such geopolitical instability tends to negatively impact risk-sensitive currencies like the Australian Dollar, particularly when paired with global trade headwinds.
US Dollar Weakens on Softer Inflation, Fed Rate Cut Bets Rise
The US Dollar Index (DXY) continued its decline on Thursday, hovering near 98.30, amid signs of easing inflation. US CPI data for May showed a year-over-year increase of 2.4%, slightly higher than April’s 2.3% but below the forecasted 2.5%. Core CPI, excluding food and energy, rose 2.8%, underperforming the expected 2.9%.
The inflation data has further cemented market expectations of a potential Fed rate cut in September. However, uncertainty remains as President Trump reiterated that he may extend the trade negotiation deadlines but believes it might not be necessary. The US Court of Appeals also ruled that the administration’s broad tariffs can stay in effect during ongoing legal challenges, adding further complexity to trade outlooks.
Mixed Economic Data from China and Australia Weighs on AUD
China reported a trade surplus of CNY 743.56 billion in May, up from CNY 689.99 billion previously. However, export growth slowed to 6.3% year-on-year from 9.3%, while imports declined 2.1% after rising 0.8% in April—adding to signs of fragility in global trade flows.
Australia’s trade surplus narrowed to AUD 5.41 billion in April, below the expected AUD 6.1 billion and a downwardly revised AUD 6.89 billion from March. The decline was driven by a 2.4% drop in exports and a 1.1% increase in imports. While China’s Caixin Services PMI rose to 51.1 in May as expected, it had little positive spillover for the AUD.
Technical Outlook: AUD/USD Tests Key Support Zone at 0.6500
The AUD/USD pair is trading near 0.6500, within a crucial support zone marked by the lower boundary of an ascending channel. A decisive break below this level—aligned with the nine-day Exponential Moving Average (EMA) at 0.6492—could undermine the bullish momentum.
Despite the bearish pressure, the 14-day Relative Strength Index (RSI) remains above the neutral 50 mark, suggesting lingering bullish bias. Immediate resistance is located at the June 5 high of 0.6538, with further upside potential toward 0.6687 and the channel top at 0.6720. On the downside, a break below 0.6490 could expose the 50-day EMA support near 0.6419.