AUD/USD weakens as US Dollar gains on hawkish Fed signals

• The Australian Dollar weakens against a firmer US Dollar amid hawkish signals from the US central bank.
• Australian trade data show a wider surplus in December, driven by higher exports and lower imports.
• Markets are awaiting a speech from the Australian central bank governor later in the day.

AUD/USD trades lower on Thursday and is hovering around 0.6965 at the time of writing, down 0.45% on the day. The pair remains under pressure as the US Dollar (USD) benefits from a firmer bias, supported by hawkish signals from the Federal Reserve (Fed), while Australian macroeconomic data fail to provide strong support for the local currency.

The Australian Dollar (AUD) reacts modestly to the release of Australia’s Trade Balance data, which showed the surplus widening to 3.373 billion AUD in December, from 2.597 billion previously and slightly above market expectations. Exports rose 1.0% MoM, following a sharp contraction in November, mainly driven by metals and mineral ores, while imports fall 0.8%, weighed down by other manufactured goods. Despite these seemingly solid figures, the impact on the Australian Dollar remains limited in an environment dominated by external factors.

Regional activity indicators provide mixed support. In China, a key trading partner for Australia, the Services Purchasing Managers Index (PMI) improved in January, pointing to better economic momentum. In Australia, PMI data released by S&P Global showed a sharp acceleration in activity in January, with strong expansion in the Services sector and the Composite PMI reaching its highest level in nearly four years. These data confirm the resilience of the Australian economy, but they are not enough to reverse the negative trend of the AUD against the Greenback.

On the monetary policy front, the Reserve Bank of Australia (RBA) recently raised its policy rate by 25 basis points to 3.85%, citing stronger-than-expected growth and persistent inflationary pressures. During the post-meeting press conference, Governor Michele Bullock stressed that inflation remains too high and that a return to target will take longer, while reaffirming a data-dependent approach. Market attention now turns to her speech scheduled later in the day, which could provide fresh guidance on the future direction of monetary policy.

On the US side, the US Dollar Index (DXY), which tracks the greenback’s performance against a basket of major currencies, holds up near 97.77. The US Dollar is supported by investors reassessing expectations toward a slower pace of rate cuts. Several Fed officials have emphasized the need for clearer evidence of easing inflation before considering further rate reductions, lending additional support to the US currency.

Against this backdrop, AUD/USD dynamics remain driven by the divergence in tone between central banks and the relative strength of the US Dollar, despite mixed signals from economic data.