Why Is the Australian Dollar Falling? Trade War Fears & Fed Policy Impact Explained | AUD/USD Analysis

What's Driving the Australian Dollar's Decline?litecoin price prediction 2025

The Australian Dollar (AUD) has extended its losing streak against the US Dollar (USD) for three consecutive trading sessions as of Monday. This downward pressure stems from multiple macroeconomic factors creating headwinds for the commodity-linked currency.

Trade War Escalation Weighs on AUD

Recent announcements from Washington regarding import tariffs have significantly impacted market sentiment. The White House has proposed sweeping 25% duties on steel and aluminum imports, though specific country exemptions remain unclear. This protectionist move threatens Australia's export-driven economy, particularly given its close trade relationship with China.

Simultaneously, China implemented retaliatory tariffs on select US goods this week, intensifying trade tensions between Australia's largest trading partner and its strategic ally. The lack of progress in US-China trade negotiations following the cancellation of a scheduled leaders' call has further dampened market optimism.

Monetary Policy Divergence Plays Key Role

Market participants now anticipate a 95% probability of the Reserve Bank of Australia (RBA) cutting its cash rate from 4.35% to 4.10% at its upcoming February meeting. This expectation follows recent inflation data showing faster-than-expected moderation in price pressures, prompting major Australian financial institutions to revise their rate cut forecasts forward from May.

Meanwhile, the US Dollar continues to find support from shifting Federal Reserve policy expectations. Friday's mixed jobs report - showing slower payroll growth but a declining unemployment rate - has reinforced the view that the Fed will maintain current interest rates throughout 2025.

Technical Outlook for AUD/USD

The currency pair currently tests critical support near the 14-day Exponential Moving Average (EMA) around 0.6250. A decisive break below this level could signal further downside potential, with the next support zone at 0.6087 (February's low).

On the upside, resistance appears near the eight-week high of 0.6330 reached in late January. The Relative Strength Index (RSI) hovering near 50 suggests the pair remains in neutral territory, awaiting clearer directional cues.

Broader Market Context

China's economic indicators present a mixed picture, with January's Consumer Price Index showing modest improvement (0.5% YoY) while Producer Prices continue their deflationary trend (-2.3% YoY). These figures remain crucial for AUD sentiment given Australia's export exposure to Chinese demand.

Federal Reserve officials have emphasized data dependency in their policy approach, with some suggesting openness to rate cuts should inflation continue moderating while employment remains stable. This cautious stance contrasts with the RBA's apparent readiness to ease policy sooner.

As trade tensions evolve and central bank policies diverge, AUD/USD volatility may persist in the near term. Market participants should monitor upcoming economic releases and policy statements for further guidance on this currency pair's trajectory.