AUD/USD is holding steady after posting petite losses in the previous session, trading around 0.6680 during Asian hours on Wednesday. The pair may continue to weaken as the US dollar (USD) rises despite lower inflation in the United States (US), suggesting that the Federal Reserve (Fed) may indeed lower interest rates priced in by financial markets.
The U.S. core consumer price index (CPI), excluding food and energy, rose 0.2% in December, below market expectations, while annual core inflation held steady at 2.6%, hitting a four-year low. The data provided clearer signs of weakening inflation after earlier releases were distorted by the effects of the economic shutdown. However, last Friday’s powerful nonfarm payrolls report, decline in the unemployment rate, and solid four-week average ADP employment change point to a resilient labor market.
However, the AUD/USD pair may benefit as the Australian dollar (AUD) may find support from rising expectations of further interest rate increases by the Reserve Bank of Australia (RBA) following a solid rebound in Australian building permits data.
Total housing sales approvals in Australia rose 15.2% month-on-month to an almost four-year high of 18,406 homes in November 2025, according to preliminary estimates. This marked a edged reversal of the previous month’s 6.1% decline and represented the strongest monthly gain since May 2023.
Continued powerful demand for housing may be a concern for the RBA as it may snail-paced progress towards easing inflationary pressures and reinforce expectations for tighter monetary policy. This is despite November’s moderate inflation, which remains above the central bank’s target.
Traders are likely to see trade balance data for December later in the day from China, Australia’s close trading partner. The trade balance is expected to enhance to $113.60 billion in December compared to $111.68 billion in the previous reading. Exports are expected to enhance by 3.0% y/y in December, while imports are expected to enhance by 0.9% y/y in the same period.
Australian Dollar FAQs
One of the most crucial factors for the Australian dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). As Australia is a resource-rich country, another key factor influencing price is the price of its largest export, iron ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as Australia’s inflation, its dynamics and its trade balance. Market sentiment – whether investors take on riskier assets (risk-on) or look for unthreatening havens (risk-off) – also matters, with positive risk for the AUD.
The Reserve Bank of Australia (RBA) influences the Australian dollar (AUD) by setting the interest rates that Australian banks can lend to each other. This affects the level of interest rates throughout the economy. The RBA’s main goal is to maintain a stable inflation rate of 2-3% by raising or lowering interest rates. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low ones. The RBA may also operate quantitative easing and tightening to influence lending conditions, the former being AUD negative and the latter AUD positive.
China is Australia’s largest trading partner, so the health of the Chinese economy has a major impact on the value of the Australian dollar (AUD). When the Chinese economy does well, it buys more raw materials, goods and services from Australia, increasing demand for the AUD and increasing its value. The opposite is the case when the Chinese economy is not growing as rapid 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, worth $118 billion a year in 2021 figures, with China being the main buyer. The price of iron ore can therefore influence the Australian dollar. Generally speaking, if the price of iron ore increases, the AUD also increases, as aggregate demand for the currency increases. The opposite is true when 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 for the AUD.
The trade balance, or the difference between what a country earns from exports and what it pays for imports, is another factor that can affect the value of the Australian dollar. If Australia produces a highly sought after export, then its currency will only appreciate in value as a result of the excess demand created by foreign buyers wanting to buy its exports compared to spending on import purchases. Therefore, a positive net trade balance strengthens the AUD, and the effect is opposite if the trade balance is negative.
