The AUD/USD pair halts its five-day losing streak, trading around 0.6200 during the European hours on Monday. The pair appreciates as the US Dollar (USD) remains softer amid thin trading ahead of New Year’s holiday, while US Treasury bond yields depreciate.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against its six major peers, trades around 108.00, with 2-year and 10-year yields on US Treasury coupons standing at 4.30% and 4.59%, respectively, at the time of writing.
The US Dollar may receive upward support from growing expectations of fewer rate cuts next year by the US Federal Reserve (Fed). Traders continue to digest the Fed’s hawkish pivot. The Fed cut its benchmark interest rate by a quarter point at the December meeting, and the latest Dot Plots indicated two rate cuts next year.
Additionally, the Australian Dollar (AUD) finds support from an improved 10-year government bond yield, which is trading around 4.50%, its highest level in over a month. Meanwhile, the Reserve Bank of Australia (RBA) has reiterated its commitment to maintaining a “sufficiently restrictive” policy stance until inflation uncertainty diminishes and the 2–3% target range is achieved.
The RBA emphasized that its primary focus is bringing inflation back to target, relying on a data-driven approach for future rate decisions. The December meeting minutes highlighted growing confidence among central bank’s policymakers in their ability to control inflation, although they acknowledged ongoing risks. Market expectations suggest a divided outlook, with some anticipating a 25 bps rate cut as early as February, while a full easing is more widely priced in by April.
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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EUR/USD remains stuck in a tight channel above 1.0400 to begin the new week. Thin trading conditions cause the activity in financial markets to stay subdued in between Christmas and New Year holidays, making it difficult for the pair to find direction.
GBP/USD struggles to build on Friday's gains and trades in a narrow channel below 1.2600 in the European morning on Monday. In the absence of high-tier data releases, the cautious market mood limits the pair's upside, while trading conditions remain thin.
Gold holds steady above $2,600 after failing to make a decisive move in either direction in the previous week. Growing expectations for a cautious approach to policy easing by the Fed in 2025 limits XAU/USD's upside heading into the New Year holiday.
Money managers may adjust their portfolios ahead of the year-end. Weekly US Jobless Claims serve as the first meaningful release in 2025. The ISM Manufacturing PMI provides an initial indication ahead of Nonfarm Payrolls.
Money managers may adjust their portfolios ahead of the year-end. Weekly US Jobless Claims serve as the first meaningful release in 2025. The ISM Manufacturing PMI provides an initial indication ahead of Nonfarm Payrolls.
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