AUD/USD declined from 0.6400 as the US Dollar regained losses, despite weak US S&P Global PMI data for February. The US Dollar Index rose above 106.50, indicating a recovery in the Greenback.
The PMI report revealed overall business activity was still expanding, but the Services PMI fell to 49.7 from 52.9, marking a contraction. Meanwhile, the Manufacturing PMI improved to 51.6.
Attention is turning towards upcoming Australian monthly CPI data, expected to show a rise to 2.6%. This data will impact the Reserve Bank of Australia’s policy direction, following a recent rate cut.
Key factors influencing the Australian Dollar (AUD) include interest rates set by the RBA and the price of Iron Ore, Australia’s largest export. The health of the Chinese economy plays a significant role as well, affecting demand for Australian goods.
The Trade Balance also impacts the AUD value; a positive balance strengthens the currency, while a negative balance weakens it. Iron Ore prices and demand for Australian exports are crucial in this context.
Given that the Australian Dollar pulled back after reaching 0.6400, it’s clear that the US Dollar’s strength outweighed weak PMI numbers. The fact that the Services PMI dipped into contraction territory at 49.7 while the Manufacturing PMI rose to 51.6 suggests a mixed economic picture in the US. Markets are prioritising the Greenback’s broader recovery rather than fixating on this data point. With the US Dollar Index crossing 106.50, momentum has shifted in favour of the world’s reserve currency, at least for now.
Despite this, attention is already shifting towards inflation data out of Australia. Markets are preparing for a potential increase in monthly CPI to 2.6%, a number that will heavily influence expectations for the Reserve Bank of Australia. After the recent rate cut, any surprise deviation could prompt volatility in the pair. If inflation comes in hotter than anticipated, traders may start questioning whether the RBA will continue down the easing path as expected. On the other hand, a lower reading would reinforce expectations that rates may stay lower for longer.
Beyond inflation, there are other factors we should keep an eye on. The value of Australia’s biggest export, Iron Ore, carries weight in determining the Aussie Dollar’s movements. If prices begin to tumble due to weakening demand, it would pressure the currency further. Given China’s role as Australia’s largest trading partner, the health of its economy remains critical. Should Chinese demand falter, that would weigh on Australia’s exports, further straining the currency.
Trade balance is another piece of this puzzle. When exports exceed imports, it can act as a pillar of support for the currency. Should the trade balance shift negatively, this would have the opposite effect. Since Iron Ore makes up a large portion of export revenues, price fluctuations remain essential to this equation.
For those trading derivatives on this pair, careful monitoring of inflation data, export demand, and global risk sentiment is essential. If the inflation reading exceeds expectations, volatility could pick up as market participants assess the RBA’s potential reaction. Conversely, weaker CPI data would likely bolster the case for a softer monetary policy stance. Keeping an eye on shifts in commodity prices, particularly Iron Ore, will also be necessary to gauge possible moves in the Australian Dollar.
