AUD/USD hits six-month high as Trump’s trade threats boost Australian dollar
The Australian dollar strengthens to a six-month high against the US dollar as Trump’s trade threats undermine USD support despite a dovish RBA rate cut. Key inflation data and Fed updates remain in focus.
The AUD/USD‘s revival continued last week as it closed at 0.6494, securing a gain of 1.44% for the week, almost 10% above its April 0.5912 low.
The rally occurred despite a dovish 25 basis point (bp) Reserve Bank of Australia (RBA) rate cut last week, with the bulk of the gains coming on Friday after President Trump threatened a 50% tariff on the European Union (EU) from 1 June and a 25% levy on Apple, a move which further undermined fragile support for the US dollar.
Although President Trump has since pushed back the EU trade deal deadline to 9 July after a conversation with EU President Ursula von der Leyen, the AUD/USD extended its gains this morning to hit a six-month high of 0.6537.
Improved risk sentiment supports Australian dollar rally
The move to new highs in the AUD/USD has been bolstered by improved risk sentiment, as United States (US) equity futures opened and traded 1% higher today. More broadly, Trump’s renewed hawkish trade policy serves as a reminder of ongoing trade policy uncertainty amid heightened fiscal concerns and de-dollarisation concerns related to trust in US assets.
Looking ahead, key drivers from the US side include updates on tariffs, fiscal concerns, the Federal Open Market Committee (FOMC) meeting minutes, and the Fed’s preferred measure of inflation, the core personal consumption expenditures (PCE) price index. Locally, the primary focus will be on Wednesday’s monthly consumer price index (CPI) indicator.
Monthly CPI indicator
Wednesday, 28 May at 11.30am AEST
In the March 2025 quarter (Q1) inflation report released at the end of April, headline inflation rose by 0.9%, which saw the annual rate remain at 2.4%. The RBA’s preferred measure of inflation, the trimmed mean, rose by 0.7% in the quarter, allowing the annual rate to fall to 2.9% from 3.3% prior. At the same time, the monthly CPI indicator (for March) rose by 2.4% year-on-year (YoY), unchanged from February. The annual trimmed mean inflation measure within the monthly CPI indicator remained at 2.7% YoY in March from 2.7% in February.
At last week’s meeting, the Reserve Bank of Australia delivered a dovish 25 bp cut, taking its cash rate to 3.85%. The rate cut was widely expected after the weaker inflation readings outlined above, which saw both trimmed mean and headline inflation fall within the RBA’s 2% to 3% target range for the first time since Q4 2021.
RBA signals dovish stance amid cooling inflation
The RBA’s dovish tones were reinforced by its cooler inflation forecasts and in the press conference, where the RBA Governor acknowledged that a 50 bp cut was considered, and that the RBA would likely have cut rates last week even without the Liberation Day tariff fiasco.
The preliminary expectation for the monthly CPI indicator is for headline inflation to ease to 2.3% in April from 2.4% prior. The trimmed mean is expected to remain at 2.7%.
The interest rates market starts this week, pricing in a 60% chance of a 25 bp RBA rate cut in July and a cumulative 66 bp of rate cuts between now and year-end.
