Australian Dollar holds gains as Trump delays tariffs on Canada, Mexico

• The Australian Dollar strengthened as risk sentiment improved after Trump halted tariffs on Mexico and Canada.
• Traders monitor the development surrounding the tariff deal with China.
• Trump would suspend his tariffs after both countries agreed to send 10,000 soldiers to the US border to prevent drug trafficking.

The Australian Dollar (AUD) rebounds on Tuesday, ending its six-day losing streak as the AUD/USD pair rises amid a weakening US Dollar (USD). The USD depreciated after US President Donald Trump announced late Monday that he would pause tariffs on Mexico and Canada. However, market volatility remains a concern as investors closely watch developments in the ongoing tariff negotiations with China, Australia's key trading partner.

President Trump stated that he would suspend steep tariffs on Mexico and Canada after their leaders agreed to deploy 10,000 soldiers to the US border to combat drug trafficking. The tariffs on Mexico and Canada have been postponed for at least 30 days. This decision comes just two days after Trump imposed 25% tariffs on Mexican and Canadian goods and 10% tariffs on imports from China.

The AUD may lose its ground due to the increased likelihood that the Reserve Bank of Australia (RBA) could consider a rate cut in February. The RBA has maintained the Official Cash Rate (OCR) at 4.35% since November 2023, emphasizing that inflation must "sustainably" return to its 2%-3% target range before any policy easing.

Australian Dollar appreciates due to improved risk sentiment

• The US Dollar Index (DXY), which measures the US Dollar's value against six major currencies, stabilizes around 108.70 at the time of writing after giving up most of its gains in the previous session.
• Data released by the Institute for Supply Management (ISM) on Monday showed that the Manufacturing PMI rose to 50.9 in January from 49.3 in December. This reading came in better than the estimation of 49.8.
• The US Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred inflation gauge, rose 0.3% MoM in December, up from 0.1% in November. On an annual basis, PCE inflation accelerated to 2.6% from the previous 2.4%, while core PCE, which excludes food and energy, remained steady at 2.8% YoY for the third straight month.
• Fed Chair Jerome Powell emphasized during the post-meeting press conference that the central bank would need to see "real progress on inflation or some weakness in the labor market" before considering any further adjustments to monetary policy.
• US Treasury Secretary Scott Bessent warned Key Square Capital Management partners a year ago that "tariffs are inflationary and would strengthen the US Dollar--hardly a good starting point for a US industrial renaissance." However, according to the Financial Times (FT), Bessent last week advocated for new universal tariffs on US imports, proposing an initial 2.5% rate that would gradually increase.
• President Trump announced his threat on X (formerly Twitter) to levy 100% tariffs on BRICS nations if they attempt to introduce an alternative currency to challenge the US dollar in international trade.
• Australia's Retail Sales declined by 0.1% month-on-month in December 2024, marking the first drop in nine months. Although the decline was less severe than the anticipated 0.7% contraction. The annual sales increased by 4.6% compared to December 2023. On a seasonally adjusted basis, sales rose 1.0% QoQ in the December quarter of 2024.
• China's Caixin Manufacturing Purchasing Managers' Index (PMI) declined to 50.1 in January, down from 50.5 in December. The reading fell short of market expectations, which had anticipated a steady 50.5.
• ANZ, CBA, Westpac, and now National Australia Bank (NAB) all anticipate a 25 basis point (bps) rate cut from the Reserve Bank of Australia (RBA) in February. Previously, the NAB had forecasted a rate cut in May but has now moved its projection forward to the February RBA meeting.
• The Reserve Bank of Australia released its January 2025 Bulletin, featuring a detailed analysis of how monetary policy changes influence interest rates in the economy and how fluctuations in interest rates impact economic activity and inflation.

Australian Dollar tests nine-day EMA barrier near descending channel's upper boundary

AUD/USD hovers around 0.6210 on Tuesday, trading within the descending channel pattern on the daily chart, signaling a bearish bias. However, the 14-day Relative Strength Index (RSI) has rebounded toward the 50 level, signaling weakening downside momentum. A breakout above the channel and a sustained move above the 50 mark on the RSI could indicate a shift toward a bullish bias.

On the downside, the AUD/USD pair could test the descending channel's lower boundary at the 0.6150 level. A break below the channel would guide the pair to navigate the region around 0.6087, the lowest since April 2020, recorded on February 3.

The AUD/USD pair tests its initial barrier at the nine-day Exponential Moving Average (EMA) of 0.6225, aligned with the upper boundary of the descending channel.

AUD/USD: Daily Chart