The Australian Dollar (AUD) struggled against the US Dollar (USD) on Wednesday, weighed down by new tariff concerns. US President Donald Trump announced that his administration is considering a 10% tariff on Chinese imports, effective February 1. This potential move is linked to ongoing concerns over fentanyl shipments from China to Mexico and Canada, Reuters reported.
Trump also suggested that if a deal with China regarding TikTok falls through, further tariffs could be imposed, following his recent executive order delaying the TikTok ban by 75 days. With Australia’s close trading ties to China, these developments could have significant repercussions for the Australian economy.
Chinese Vice Premier Ding Xuexiang warned on Tuesday about the negative impacts of a trade war, stating that “there are no winners” in such conflicts. This comes as China faces the possibility of tariffs from the new US administration, according to CNBC.
Despite these concerns, Australia’s S&P/ASX 200 Index saw a positive gain on Wednesday, climbing to around 8,450, its highest level in nearly seven weeks. The rally was driven by positive market sentiment following Trump’s decision to delay tariff threats, offering some relief to global markets.
US Dollar Faces Mixed Outlook Amid Tariff Talks and Inflation Data
The US Dollar Index (DXY), which tracks the performance of the Greenback against six major currencies, held steady around 108.00. However, the USD faced challenges as President Trump refrained from imposing new tariffs on his first day in office. Trump did, however, instruct federal agencies to investigate and address ongoing trade deficits, warning Mexico, Canada, China, and the EU about potential tariffs on a range of trade-related concerns.
The US Federal Reserve is expected to maintain its key interest rate in the range of 4.25%-4.50% at its January meeting. Despite this, Trump’s policies are seen potentially driving inflationary pressures, which could limit the Fed to just one more rate cut, providing some support to the USD in the short term.
US Retail Sales data for December rose by 0.4%, falling short of expectations. The US Consumer Price Index (CPI) showed an increase of 2.9% year-over-year, in line with market expectations. Core CPI, which excludes volatile food and energy prices, rose 3.2% annually, slightly below previous figures.
RBA Rate Cut Expectations Grow as Australian Economy Shows Signs of Slowing
In Australia, the Westpac Leading Index held steady in December, while the six-month annualized growth rate fell slightly to 0.25%. This slowdown, coupled with weaker inflation data, has led traders to expect the Reserve Bank of Australia (RBA) to cut interest rates as early as next month.
All eyes are now on the upcoming quarterly inflation report, which could provide further clarity on the RBA’s future monetary policy stance. Weaker core inflation, nearing the RBA’s target range of 2% to 3%, is adding pressure on the central bank to act.
Technical Outlook: AUD/USD Remains Below 0.6300, Bulls Eye Upper Channel Resistance
The AUD/USD pair traded near 0.6270 on Wednesday, moving within an ascending channel pattern, which suggests the potential for a bullish outlook. The 14-day Relative Strength Index (RSI) is slightly above the 50 mark, reinforcing market optimism.
On the upside, the pair could test the key psychological resistance level at 0.6300, with further targets near the upper boundary of the ascending channel at 0.6320. Support levels are seen at the nine-day Exponential Moving Average (EMA) around 0.6235 and the 14-day EMA at 0.6231. A more substantial support zone is around the lower boundary of the ascending channel at 0.6210, with additional support at 0.6200.
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