AUD/USD tests 14-month highs as Greenback falters
- AUD/USD added 0.66% on Tuesday as market sentiment tilts bullish ahead of the holidays.
- US Dollar flows have reversed course as Fed rate cut expectations pin on the high side.
- Wednesday will be a quiet affair on the Aussie side with Antipodean markets closed for the holiday.
AUD/USD stepped into a second straight day of firm gains on Tuesday, climbing two-thirds of one percent and adding to the previous day’s 0.68% gain as the US Dollar (USD) falls across the board. The Australian Dollar (AUD) is catching a fresh bullish bid as the Reserve Bank of Australia (RBA) faces down future interest rate hikes in 2026, while the Federal Reserve (Fed) is expected to get caught in a long-run rate-cutting cycle, depressing Greenback market flows.
Fed rate cut bets sink Greenback
The US Dollar weakened on Tuesday in thin, holiday-shortened trading as expectations for further Fed rate cuts next year continued to weigh on sentiment, even after stronger-than-expected economic data. A surprisingly robust 4.3% annualized rise in third-quarter US Gross Domestic Product (GDP) helped the dollar trim losses against the Euro (EUR), but markets still largely believe the Fed will stay on hold in January before resuming easing later in the year, with futures pricing in two cuts in 2026.
Some analysts cautioned that the headline GDP strength may overstate the economy’s underlying health, noting that growth was driven heavily by healthcare spending and inventory drawdowns rather than broad-based business momentum. Combined with signs of a weakening labor market and a drop in US consumer confidence in December, these factors reinforced the view that the dollar could remain under pressure into early next year despite near-term resilience in growth data.
Wednesday’s Asia market session will be a thin affair, with Australian exchanges shuttered for the midweek holidays.
AUD/USD daily chart
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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