The AUD/USD currency pair experienced a notable decline early Tuesday, dropping to 0.6367, down from last month’s high of 0.6515. This move came despite signs of improving trade relations between the United States and China. The dip in the Australian dollar (AUD) is being seen by many analysts as a temporary pullback, with technical and fundamental indicators aligning to suggest a potential rebound towards the 0.6500 level later this week.
The team at TelaraX explores this topic thoroughly in their publication.
US Dollar Surge: A Key Driver
One of the primary drivers of the Australian dollar’s recent weakness is the continued surge in the US dollar (USD). After hitting a multi-year low following the US President’s Liberation Day speech on tariffs, the US Dollar Index (DXY) has recovered sharply. The index climbed from a low of 97.00 to around 101.4, signaling renewed demand for the greenback across major currency pairs.
This broad-based strength in the dollar comes amid optimism over US trade policy progress. The United States and China have agreed to mutually reduce tariffs, with Washington cutting tariffs on Chinese goods to 30% and Beijing slashing its levies on American goods to 10%. This shift is being seen as a strategic win for the Chinese President, as it signals a softening of the US stance after months of tension.
Why This Matters for the Aussie
Australia’s close economic ties with China mean that any improvement in Sino-American trade relations typically benefits the Australian economy. China remains the largest trading partner for Australia, importing vast amounts of iron ore, steel, and aluminium. The expectation is that Chinese demand for these raw materials will remain robust amid stabilized trade flows, offering indirect support for the AUD.
However, this supportive fundamental backdrop has not yet translated into immediate strength for the Aussie, largely due to the overriding US dollar momentum. With traders piling into the greenback, high-beta currencies like the AUD have taken a hit despite improving trade fundamentals.
Market Focus: US Inflation Data
Tuesday’s focus will shift to the US economic calendar, as the Consumer Price Index (CPI) report is set to be released. Analysts forecast a modest rise in inflation, driven partly by the effects of newly implemented tariffs. A continued rise in US inflation would likely keep the Federal Reserve in a wait-and-see mode, with reduced chances of near-term rate cuts.
Higher inflation generally supports the USD by increasing the likelihood of interest rate hikes or at least maintaining current policy levels. This expectation has helped fuel recent gains in the dollar and is a short-term headwind for the AUD/USD pair.
AUD/USD Technical Analysis
From a technical perspective, the AUD/USD pair is currently exhibiting signs of temporary weakness, but also hints at an impending reversal.
- The pair has dropped from a high of 0.6510 to a low of 0.6370, breaking below the 50% Fibonacci Retracement level of the recent rally.
- Price action is now trading below the 25-day moving average, suggesting that near-term momentum favors the downside.
- The MACD (Moving Average Convergence Divergence) has formed a bearish crossover, reinforcing the bearish short-term outlook.
However, early reversal signals are emerging:
- The pair is nearing the lower boundary of an ascending channel that has defined price action since early April.
- It is also in the process of forming an inverse head and shoulders pattern, a classic bullish reversal formation in technical analysis.
If the price holds above the 0.6350 support level, and especially if US inflation data comes in softer than expected, traders could see a renewed push toward the 0.6500 resistance level. This level not only represents psychological resistance but also aligns closely with the upper range of the recent trading zone.
Outlook: Short-Term Dip, Medium-Term Rebound
While the Australian dollar has faced selling pressure in recent sessions, the broader picture supports a constructive outlook for the AUD/USD pair. Key elements of this view include:
- Resilient demand for Australian exports tied to Chinese infrastructure spending.
- Reduced trade uncertainty following tariff concessions between the US and China.
- Emerging signs of technical support around the 0.6350–0.6370 zone.
Traders may look for bullish opportunities if price action confirms support at the lower channel line. A break above 0.6440 would be a first indication of a potential rebound, with 0.6500 as the short-term target zone for bulls.
Conclusion
The AUD/USD pair’s decline to 0.6367 represents a corrective move rather than the beginning of a sustained downtrend. With the combination of positive trade developments, stable commodity demand, and a technical setup that supports a rebound, there is a strong case for a return to 0.6500 in the coming sessions.
