AUD/USD wavers below 0.6300 as investors await more clarity on Trump tariff policy

  • AUD/USD is trading sideways below 0.6300 as investors have stayed on the sidelines due to the absence of a comprehensive tariff plan from Trump.
  • The Fed is expected to leave interest rates unchanged on Wednesday.
  • Investors await Q4 CPI data from Australia, which will influence expectations for the RBA’s policy decision next month.

The AUD/USD pair is trading in a tight range below the immediate resistance of 0.6300 in the North American session on Thursday. The Australian pair is stuck in a tight range as investors seek more clarity on United States (US) President Donald Trump’s tariff plan.

Donald Trump has not yet released his full tariff plan, but market participants anticipated that he would soon announce tariff increases for all trading partners after returning to the White House. It has only noted that its neighbors, Canada and Mexico, could attract tariffs of 25%, and China could face 10%, which will take effect on February 1.

Trump’s release of fewer tariff plans has kept investors on edge. This has led to caution among investors towards risk-sensitive assets, which has enhanced safe-haven demand for the US Dollar (USD). The US Dollar Index (DXY), which tracks the value of the Dollar against six major currencies, is gaining ground after recording a new two-week low near 107.75 but is trading moderately, at the time of writing.

Meanwhile, investors shift their focus to the Federal Reserve’s (Fed) monetary policy announcement on Wednesday. Investors will primarily focus on the Fed’s monetary policy stance as it is widely anticipated to keep interest rates unchanged in the 4.25%-4.50% range.

On the Australian front, investors await fourth-quarter Consumer Price Index (CPI) data, due out on Wednesday. Inflation data will significantly influence market speculation over whether the Reserve Bank of Australia (RBA) will begin cutting interest rates at next month’s monetary policy meeting. Traders are currently fully pricing in a 25 basis point (bp) interest rate cut by the RBA in February, which will push interest rates down to 4.10%.

US Dollar FAQs

The United States Dollar (USD) is the official currency of the United States of America, and the “de facto” currency of a significant number of other countries where it is in circulation alongside local banknotes. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions. After World War II, the USD took over from the pound sterling as the world’s reserve currency.

The single most important factor influencing the value of the US Dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: achieve price stability (control inflation) and promote full employment. Your main tool to achieve these two objectives is to adjust interest rates. When prices rise too quickly and inflation exceeds the 2% target set by the Fed, the Fed raises rates, which favors the price of the dollar. When Inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the Dollar.

In extreme situations, the Federal Reserve can also print more dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a clogged financial system. This is an unconventional policy measure used when credit has dried up because banks do not lend to each other (for fear of counterparty default). It is a last resort when a simple lowering of interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE usually leads to a weakening of the US Dollar.

Quantitative tightening (QT) is the reverse process by which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal of maturing portfolio securities in new purchases. It is usually positive for the US dollar.

Source: Fx Street

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