The Australian Dollar (AUD) extended its gains for the second consecutive day on Friday, trading higher as US President Donald Trump delayed the implementation of reciprocal tariffs. The AUD/USD pair benefited from a weaker US Dollar (USD), which continued to lose ground amid falling US Treasury yields, despite persistent concerns about a global trade war. Market participants are now looking ahead to the release of US Retail Sales data later in the day for further market direction.
However, the Australian Dollar could face challenges as expectations of a Reserve Bank of Australia (RBA) rate cut persist. Data released this week showed consumer inflation expectations rising to 4.6% in February, up from 4.0% in January, marking their highest level since April 2024. This data comes just ahead of the RBA’s first monetary policy meeting of the year, where market odds now suggest a 95% probability of a rate cut to 4.10%. Recent data indicates that underlying inflation in Australia is cooling faster than anticipated, strengthening the case for an RBA rate cut.
The upside potential for AUD/USD could also be capped by strong US inflation data, which has reinforced expectations for prolonged Federal Reserve (Fed) interest rate holds. Fed Chair Jerome Powell recently reiterated that the central bank is not in a hurry to cut rates, citing a resilient economy and persistently high inflation.
The US Dollar Index (DXY), which tracks the USD against six major currencies, extended its losses for a fourth consecutive session, trading near 107.00. Meanwhile, US Treasury yields on the 2-year and 10-year bonds stood at 4.31% and 4.53%, respectively.
US Core Producer Price Index (PPI) inflation rose by 3.6% year-on-year in January, surpassing the expected 3.3% but slightly falling short of the revised 3.7% (previously reported as 3.5%). This has fueled expectations that the Fed will delay rate cuts until the second half of the year. Additionally, US Consumer Price Index (CPI) data showed a 3.0% year-over-year rise in January, exceeding the forecast of 2.9%. Core CPI, which excludes food and energy, increased to 3.3%, surpassing expectations of 3.1%.
In his semi-annual report to Congress, Fed Chair Powell noted that the central bank is not in a rush to lower rates due to the strength of the US job market and solid economic growth. He also suggested that US tariff policies could place further upward pressure on prices, making it harder for the Fed to reduce rates.
In a Reuters poll of economists, most now expect the Fed to delay rate cuts until the next quarter, amid rising inflation concerns. A majority of those surveyed expect at least one rate cut by June, though there is still uncertainty regarding the exact timing.
On the technical front, the AUD/USD pair was trading near 0.6320, marking a rise above both the nine- and 14-day Exponential Moving Averages (EMAs) on the daily chart, indicating strengthening short-term momentum. The 14-day Relative Strength Index (RSI) also held above the 50 mark, reinforcing a bullish outlook.
The pair may face resistance around the eight-week high of 0.6330, which was last tested on January 24. A breakout above this level could bring the psychological level of 0.6400 into focus. On the downside, key support levels are located at the 9-day EMA of 0.6290 and the 14-day EMA of 0.6279. A decisive break below these levels could signal a shift in momentum, potentially pushing the pair toward 0.6200.
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