AUD/USD trades around 0.6450 after pulling back from five-month highs
- The AUD/USD pair retreats from Monday’s five-month high of 0.6493.
- The US Dollar is gaining strength as the Fed is widely expected to keep interest rates unchanged on Wednesday.
- NAB has lifted its year-end forecast for the pair to 0.70, citing a sustained bear trend in the US Dollar.
AUD/USD is retreating from a five-month high of 0.6493 reached on Monday, slipping to around 0.6450 during the Asian session on Tuesday. The decline comes as the US Dollar (USD) strengthens ahead of the Federal Reserve’s (Fed) upcoming monetary policy decision on Wednesday.
While the Fed is widely expected to hold rates steady, investor focus remains on Chair Jerome Powell’s remarks, especially amid tariff-related uncertainties and growing pressure from President Donald Trump to cut rates.
Adding to the mix, Treasury Secretary Scott Bessent said Monday that the US is “very close to some deals,” echoing Trump’s earlier weekend comments suggesting trade agreements could be finalized soon. Trump confirmed negotiations are ongoing but ruled out talks with Chinese President Xi Jinping this week. Meanwhile, China’s Commerce Ministry stated last Friday that it is reviewing a US proposal to restart trade discussions.
On the data front, the US ISM Services PMI rose to 51.6 in April, surpassing expectations of 50.6 and improving from 50.8 in March. The New Orders Index climbed to 52.3 (from 50.4), while the Services Employment Index improved to 49 (from 46.2).
The Australian (AUD) found support after Australian Prime Minister Anthony Albanese secured a second three-year term in the 2025 Federal Election, marking significant gains in Saturday’s results. Albanese pledged a “disciplined” government focused on cost-of-living relief, renewable energy, tax cuts, housing, and healthcare.
Westpac CEO noted that the “worst is behind us” regarding consumer and business stress, with stronger-than-expected M&A financing demand. The bank is forecasting a 25bp rate cut by the Reserve Bank of Australia (RBA) at its May 19–20 meeting.
Meanwhile, National Australia Bank (NAB) has raised its year-end AUD/USD forecast to 0.70, citing a prolonged USD bear market. NAB expects the pair to remain around 0.65 through mid-year, gradually rising toward 0.67 by December. The bank attributes the outlook to changing interest rate differentials and anticipates the RBA will cut rates by 50 basis points in May.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.