The Australian Dollar (AUD) has continued to strengthen against the US Dollar (USD) despite mounting global trade tensions and a mixed bag of domestic and international economic indicators. 

As of Monday, the AUD/USD currency pair appreciated by more than 0.50%, defying headwinds from a weakening Australian macroeconomic landscape and heightened uncertainty stemming from the ongoing US-China trade standoff. Readers will find a full exploration of this topic by TelaraX brokers in the article.

AUD/USD Advances as Greenback Faces Headwinds

The recent rise in the AUD/USD pair comes amid growing economic concerns in the United States, where the US Dollar Index (DXY) is trading near 99.50. Market sentiment around the Greenback has softened due to increasing fears of slowing economic growth and resurgent inflationary pressures. 

Investors are closely watching for cues from the upcoming release of the US May ISM Manufacturing Purchasing Managers’ Index (PMI), which could further influence dollar movement.

At the heart of this shift is renewed trade rhetoric from the US President, who stated his intention to double import tariffs on steel and aluminum, from 25% to 50%. This move, aimed at fortifying the US steel industry, has already created ripple effects in global markets, particularly impacting risk-sensitive currencies like the Australian Dollar.

Trade Tensions Escalate Amid Legal Battles and Accusations

The US tariff escalation comes amid a legal tug-of-war. While the US Court of International Trade initially blocked the proposed tariffs, citing an overreach of executive power, the Federal Circuit Court of Appeals temporarily allowed the measures to proceed. The legal ambiguity is further fueling uncertainty.

Meanwhile, the US President has accused China of breaching a recent truce on tariffs agreed upon during a Geneva meeting. The US claims that China failed to lower non-tariff barriers, with Trade Representative Jamieson Greer accusing Beijing of non-compliance. In response, a Chinese Ministry of Commerce spokesperson stated that China had acted following the agreement by suspending or cancelling relevant tariffs and non-tariff measures.

Mixed Chinese and Australian Economic Indicators

The Australian Dollar, often viewed as a proxy for Chinese economic health, has remained buoyant despite mixed signals from China. According to the National Bureau of Statistics (NBS), China’s Manufacturing PMI rose to 49.5 in May, up from 49.0 in April, though still below the expansion threshold of 50. 

Meanwhile, the Non-Manufacturing PMI slipped slightly to 50.3, missing expectations of 50.6.

These figures suggest a fragile recovery in China, Australia‘s largest trading partner. Adding complexity, analysts in China predict that the People’s Bank of China (PBoC) may resort to Pledged Supplementary Lending (PSL) to inject long-term, low-cost capital into key sectors such as housing and infrastructure, which could indirectly bolster demand for Australian exports.

Domestically, Australian macroeconomic data have shown weakness. ANZ Job Advertisements dropped 1.2% in May, following a revised 0.3% fall in April, marking two straight months of contraction. 

Similarly, Retail Sales declined 0.1% month-over-month in April, underperforming expectations of 0.3% growth. Furthermore, monthly Building Permits fell by 5.7%, against forecasts of a 3.1% increase.

RBA Stance and Monetary Policy Outlook

The Reserve Bank of Australia (RBA) has signaled a dovish bias, with expectations of potential interest rate cuts in the coming months. RBA Governor Michele Bullock emphasized the central bank’s readiness to act if economic conditions deteriorate, particularly in light of international trade conflicts and their impact on global supply chains.

The RBA’s acknowledgment of progress in taming inflation has given policymakers some flexibility, though they remain cautious. The risk of recessionary forces stemming from US-China trade barriers further adds pressure on the RBA to maintain a supportive monetary policy stance.

Technical Analysis: AUD/USD Builds Momentum Above Key Support

From a technical standpoint, the AUD/USD pair is displaying bullish behavior, currently hovering around 0.6460 and trading within an ascending channel pattern. The pair has rebounded strongly from the 0.6450 support level, which aligns closely with the nine-day Exponential Moving Average (EMA).

Key indicators such as the 14-day Relative Strength Index (RSI) are now above the 50 threshold, suggesting growing buying momentum. A breakout above the resistance at 0.6537, a seven-month high, could trigger further upside, potentially driving the pair toward the 0.6650 region, near the upper boundary of the current channel.

However, if downside pressure re-emerges, immediate support lies at the 0.6445 EMA, with stronger support found near the 50-day EMA at 0.6388. A break below these levels could neutralize the current bullish outlook.

Conclusion

The Australian Dollar’s resilience amid a backdrop of rising US-China trade tensions, weaker domestic economic data, and looming RBA rate cuts is both intriguing and telling. As US Dollar weakness persists, driven by economic uncertainty, legal challenges to tariffs, and trade friction, the AUD/USD pair appears well-supported in the near term.

Market participants should keep a close eye on the evolving US-China tariff narrative, upcoming US economic releases, and potential Chinese stimulus actions, all of which are likely to shape the direction of this highly sensitive currency pair.