AUD/USD corrects to near 0.6400 as US Dollar steadies
- AUD/USD corrects sharply from an over four-month high of 0.6450 as the US Dollar strives to gain ground.
- US Bessent’s comments that China should initiate trade discussions have increased uncertainty over de-escalation in the Washington-Beijing trade war.
- Investors await the Aussie Q1 CPI data for fresh cues on the RBA’s monetary policy outlook.
The AUD/USD pair retraces to near 0.6400 during European trading hours on Tuesday from an over four-month high of 0.6450 posted earlier in the day. The Aussie pair corrects sharply as the US Dollar (USD) gains despite increasing uncertainty over the bilateral trade outlook between the United States (US) and China.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rebounds to near 99.30 after a steep correction on Monday. Market sentiment is favorable as investors expect the trade war will be limited between the world’s two largest powerhouses. S&P 500 futures have posted some gains in the European session, demonstrating an increase in risk appetite of investors.
Financial market participants have become doubtful about whether trade discussions between Washington and Beijing are getting underway. Beijing has been denying news stating trade discussions between US President Donald Trump and Chinese President Xi Jinping. However, Trump has insisted that Xi has called many times.
Meanwhile, US Treasury Secretary Scott Bessent has not backed Trump’s claim of trade discussions with China’s Xi but has stated that Beijing should initiate trade talks, given their significant reliance on their exports to the US. “I believe that it’s up to China to de-escalate, because they sell five times more to us than we sell to them, Bessent said in an interview on CNBC’s Squawk Box on Monday.
Escalating uncertainty about US-China trade relations also weighs on the Australian Dollar (AUD), which is a proxy for the Chinese economy, being its largest trading partner.
This week, investors will keenly focus on a slew of US data, including the Nonfarm Payrolls (NFP), which will influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook.
In the Australian region, investors will pay close attention to the Q1 Consumer Price Index (CPI) data, which will be released on Wednesday. Year-on-year Aussie inflation is expected to have grown by 2.2%, slower than the 2.2% growth seen in the last quarter of 2024. Signs of inflationary pressures cooling down would boost traders’ confidence that the Reserve Bank of Australia (RBA) will cut interest rates in the May policy meeting.
US-China Trade War FAQs
Generally speaking, a trade war is an economic conflict between two or more countries due to extreme protectionism on one end. It implies the creation of trade barriers, such as tariffs, which result in counter-barriers, escalating import costs, and hence the cost of living.
An economic conflict between the United States (US) and China began early in 2018, when President Donald Trump set trade barriers on China, claiming unfair commercial practices and intellectual property theft from the Asian giant. China took retaliatory action, imposing tariffs on multiple US goods, such as automobiles and soybeans. Tensions escalated until the two countries signed the US-China Phase One trade deal in January 2020. The agreement required structural reforms and other changes to China’s economic and trade regime and pretended to restore stability and trust between the two nations. However, the Coronavirus pandemic took the focus out of the conflict. Yet, it is worth mentioning that President Joe Biden, who took office after Trump, kept tariffs in place and even added some additional levies.
The return of Donald Trump to the White House as the 47th US President has sparked a fresh wave of tensions between the two countries. During the 2024 election campaign, Trump pledged to impose 60% tariffs on China once he returned to office, which he did on January 20, 2025. With Trump back, the US-China trade war is meant to resume where it was left, with tit-for-tat policies affecting the global economic landscape amid disruptions in global supply chains, resulting in a reduction in spending, particularly investment, and directly feeding into the Consumer Price Index inflation.
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