The Australian dollar (AUD) was little changed against the US dollar (USD) on Monday as a stronger dollar keeps the Aussie on the defensive. At the time of writing, AUD/USD is hovering around 0.7072, rebounding from three-year highs near 0.7147 reached overdue last week.
Trading conditions also remain challenging at the start of the week, further limiting volatility. U.S. markets are closed for Presidents’ Day, and several Asian markets are observing the Lunar New Year holiday.
The dollar is showing tentative signs of stabilization after recent weakness as investors reassess the timing of the Federal Reserve’s interest rate cuts following last week’s labor market and inflation data.
The headline consumer price index (CPI) rose 0.2% month-on-month in January, slowing from 0.3% in December. On an annual basis, inflation fell to 2.4% from 2.7%. At the same time, the unemployment rate dropped to 4.3% from 4.4%.
On the labor market, employment in the non-agricultural sector increased by 130,000 in January, rebounding from the revised December enhance of 48,000. and significantly exceeding market expectations. At the same time, the unemployment rate dropped to 4.3% from 4.4%.
Overall, solid labor market conditions have tempered expectations for near-term monetary easing, while moderating inflation keeps the Fed on a path of gradual rate cuts as price pressures approach its 2% target.
Following the CPI release, investors slightly increased their bias towards policy easing later this year, pricing in interest rate futures for cuts of more than 50 basis points (bps) by the end of 2026. According to the CME FedWatch Tool, investors now expect the first rate cut to occur in June.
Attention now turns to the huge chunk of US macroeconomic data due out later this week. On Wednesday, investors will review the latest Fed meeting minutes for modern clues about the outlook for monetary policy. On Friday, markets will assess the headline personal consumption expenditure (PCE) inflation report and the flash reading of gross domestic product (GDP) for the fourth quarter.
In Australia, investors are now awaiting the minutes of the Reserve Bank of Australia (RBA) meeting, due on Tuesday, for more details on the central bank’s latest decision. The RBA started 2026 with a hawkish move, raising the interest rate by 25 basis points to 3.85% from 3.60% in response to persistent inflation pressures.
Governor Michele Bullock reiterated that the council would not provide guidance going forward and would continue to focus on incoming data. Looking ahead, Thursday’s jobs report will be key in shaping near-term expectations, with markets increasingly pricing in the risk of another rate hike as early as May.
Australian Dollar FAQs
One of the most essential 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 secure 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 utilize 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 quick 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.
