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AUD Faces Headwinds as Trade Tensions Rise Amid Economic Growth

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icon 05/02/25
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AUD Faces Headwinds as Trade Tensions Rise Amid Economic Growth

The Australian Dollar is experiencing challenges as investor sentiment turns cautious amid escalating US-China trade tensions. Recent economic indicators show some positive growth in Australia’s economy, with the Judo Bank Composite Purchasing Managers Index (PMI) rising to 51.1 in January from 50.2 in December, indicating a modest expansion in private sector activity. The Judo Bank Services PMI has also shown growth, climbing to 51.2, marking the twelfth consecutive month of expansion in the services sector. Despite these improvements, the AUD has fallen against the US Dollar due to heightened risk aversion.

Market analysts suggest that further depreciation of the Australian Dollar could occur, particularly with the Reserve Bank of Australia (RBA) potentially considering a rate cut at its upcoming meeting. The RBA has maintained the Official Cash Rate at 4.35% since November and is focused on achieving sustainable inflation within the target range of 2%-3% before making any adjustments to monetary policy.

Investors remain wary as the trade conflict between the United States and China continues to unfold. In response to the US imposing a new 10% tariff, China announced retaliatory tariffs on various American goods, including coal and liquefied natural gas. This intensifying conflict has significant implications for Australia, given its reliance on China as a key trading partner.

In the United States, the Dollar Index has faced downward pressure, trading around 108.00, and market participants are preparing for upcoming employment data that could influence future Federal Reserve policy. An executive order has been signed to establish a government-owned investment fund, which may impact operations with platforms like TikTok.

Meanwhile, labor market data revealed a drop in job openings, indicating a stable but cautious employment landscape. With the Federal Reserve adopting a wait-and-see approach amid ongoing economic uncertainty, analysts highlight the need for careful assessment before any potential policy changes are made. The AUD/USD trading pattern suggests a possible bullish shift if it can maintain its position above key technical levels, indicating a complex interplay of external and internal economic factors.

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