AUD/USD declines as market braces for RBA rate cut amid rising trade tensions

• The Australian Dollar extends losses for the third straight day, pressured by interest rate cut bets and risk-off flows.
• AUD/USD drops below 0.6550, hovering near the 0.6500 level during American trading hours.
• The RBA is widely expected to cut the Official Cash Rate by 25 bps on Tuesday, marking its third rate reduction in 2025.

The Australian Dollar (AUD) weakens further against the US Dollar (USD) on Monday, marking its third consecutive daily decline, as investors grow increasingly confident the Reserve Bank of Australia (RBA) will deliver another rate cut at Tuesday's meeting. Adding to the downside pressure on the Aussie, rising trade tensions ahead of the July 9 US tariff deadline are further dampening risk appetite, fueling demand for the safe-haven Greenback.

The AUD/USD pair slips below 0.6550, hovering near the 0.6500 mark during the American trading hours, easing from the eight-month high reached last week. The pair is down around 0.85% on the day, as traders turn defensive ahead of the RBA's policy announcement.

Meanwhile, the US Dollar Index (DXY), which tracks the Greenback's performance against a basket of six major currencies, is trading near 97.30, staging a mild rebound. The US Dollar is drawing support from renewed safe-haven flows and reduced expectations for a Fed interest rate cut in the near term.

The RBA is widely expected to deliver a 25-basis-point (bps) rate cut on Tuesday, bringing the Official Cash Rate (OCR) down from 3.85% to 3.60%. This would mark the third reduction in 2025, as the central bank continues to respond to a weakening economic backdrop. Markets currently assign over a 90% chance to the July move, with forecasts now extending toward further reduction in August, perhaps even into November.

Most major Australian banks, including Westpac, Commonwealth Bank, and NAB, have aligned with the market consensus, forecasting a 25 bps rate cut in July. Westpac's chief economist, Luci Ellis, a former RBA figure, has shifted her view to favour a July cut, calling it the most prudent response given recent Consumer Price Index (CPI) data coming in softer than anticipated. Commonwealth Bank echoes this, forecasting two cuts in July and August, based on easing inflation and a dovish central bank tone.

The RBA's rate-cut trajectory is primarily driven by a softening domestic economy and a continued decline in inflationary pressures. Key economic indicators indicate weakening momentum, with household consumption remaining subdued, retail sales exhibiting only marginal growth, and business confidence declining. Growth has slowed notably in recent months, with first-quarter Gross Domestic Product (GDP) expanding just 0.2%, while annualized inflation has cooled to 2.1%, toward the lower end of the RBA's 2%-3% target band.

Traders will also closely watch the RBA's monetary policy statement for hints on the forward path of interest rates. While a 25 bps cut is widely expected and priced in, any signal of additional easing in the months ahead could weigh further on the Australian Dollar. A dovish tone from the central bank would likely keep AUD/USD under pressure, especially amid ongoing trade tensions.