Due to the acceleration of Australian inflation, market expectations for a cash rate cut have shifted to March. Major banks believe that the cycle is over. With the de-escalation of the US-China trade conflict, these factors are helping the AUD/USD pair. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Inflation in Australia has accelerated.
- The market does not believe in an RBA rate cut in 2025.
- The US may lower tariffs on imports from China.
- Long trades on the AUD/USD pair can be opened with targets of 0.666 and 0.675.
Weekly Fundamental Forecast for Australian Dollar
Slow and steady wins the race. The Reserve Bank of Australia was in no hurry to raise rates during the Fed’s most aggressive tightening cycle in 40 years. Nevertheless, it managed to bring inflation back under control. Australian inflation is starting to accelerate again, and the RBA has no choice but to discuss ending the cycle of monetary expansion. Coupled with the de-escalation of the US-China trade conflict, AUD/USD bulls are pushing the quotes higher.
Inflation in Australia and Other Countries
Source: Bloomberg.
In the third quarter, consumer prices in Australia accelerated to 3.2% year-on-year and 1.3% quarter-on-quarter, the largest quarterly increase since 2023. In September, inflation rose to 3.5% year-on-year. As a result, the futures market lowered its expectations for a sharp cash rate cut in early November from 40% to 8%. The odds of at least one act of monetary expansion fell to 25%.
Before the consumer price report, RBA Governor Michele Bullock described monetary policy as marginally tight and emphasized that the central bank had less room to ease than other regulators because it had not raised its key rate high.
Central Banks’ Interest Rates
Source: Bloomberg.
Accelerating inflation in the third quarter and September shifted the timing of the expected cash rate cut to March. Major banks, including CIBC, Commonwealth Bank of Australia, Bank of America, and JP Morgan, believe that the Reserve Bank’s monetary expansion cycle has come to an end. If so, the divergence in monetary policy with the Fed will push the AUD/USD pair higher.
Eased tensions between the US and China also support the Australian dollar. When Donald Trump announced 100% tariffs, AUD/USD quotes plummeted to their lowest level since August. However, thanks to successful negotiations and an upcoming meeting between the leaders of the world’s largest economies, the aussie quickly recovered. The Wall Street Journal reported that in response to Beijing’s tightening of export controls on chemicals used to produce fentanyl, Washington may reduce import duties from 20% to 10%.
Should this occur, the average US tariff on imports from China will decrease from 55% to 45%. It will be closer to the tariffs imposed on other countries, which will boost demand for Chinese goods within the US. Export growth will have a positive impact on the economy and the yuan, as well as its proxy currencies, including the Australian dollar.
Weekly AUDUSD Trading Plan
Divergence in monetary policy and flight from safe-haven currencies amid de-escalation of the US-China trade conflict are dragging the AUD/USD pair towards 0.666 and 0.675. Long trades can be considered on pullbacks, adding them to the ones opened at 0.649.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
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