The Australian Dollar (AUD) is rising against the US Dollar (USD) due to increasing tensions between the US and European Union (EU). Right now, AUD/USD is trading at approximately 0.6744, showing gains for the second straight day. The US Dollar is under pressure following President Trump’s threat of tariffs on eight European countries linked to Greenland. This has raised concerns about possible retaliatory actions from the EU, which could escalate a wider trade conflict and impact the EU-US trade agreement from last year.

US Trade Politics

Key US officials, including Trade Representative Jamieson Greer and Commerce Secretary Howard Lutnick, are backing the administration’s trade policy. However, the US Supreme Court has yet to rule on the legality of these tariffs, leaving some uncertainty regarding their future. Support for the Australian Dollar also comes from China’s economic performance, as its GDP grew by 1.2% QoQ, exceeding expectations. The Reserve Bank of Australia (RBA) might consider raising rates in February, with upcoming employment data in Australia being significant to watch. In the US, the Federal Reserve is expected to keep current interest rates steady during its January meeting, but the market predicts more rate cuts later this year. Traders are keenly awaiting US data releases like the PCE inflation report and the third-quarter GDP estimates. In January 2025, a similar situation arose with US-EU tensions boosting the Australian dollar. Now, on January 20, 2026, trade issues have shifted from specific tariffs to broader regulatory disputes, especially regarding the EU’s Carbon Border Adjustment Mechanism. This ongoing disagreement adds to the weakness of the US dollar against certain currencies.

Trade Policy Concerns

The “Sell America” mentality from last year has eased, but worries persist. Although the specific tariff threats regarding Greenland from 2025 are now in the past, the US trade deficit with the EU grew to over $210 billion for the entire year 2025. This indicates that trade policy continues to be a point of concern for the markets. Traders should be alert for any renewed tariff discussions, which might lead to sudden weakness in the USD. Unlike early 2025, when strong Chinese data supported the Aussie, the current outlook is more mixed. China’s Q4 2025 GDP growth of 4.7% slightly missed expectations, and December 2025 industrial production numbers showed a worrying decline. This contrasts with the economic strength observed a year ago, which dampens enthusiasm for the Australian dollar. The divergence in central bank policies we anticipated in 2025 has also changed. Previously, we expected a rate hike from the RBA against future cuts by the Fed. Now, the Reserve Bank of Australia is holding firm at 4.10% due to slowing domestic inflation. Meanwhile, the Federal Reserve, having cut rates throughout 2025, is signaling a long pause, which diminishes any clear advantage for the AUD. With these mixed factors, traders might want to focus on buying volatility instead of simply betting on a direction. One-month implied volatility for AUD/USD options is currently around 11%, indicating that the market anticipates a significant movement. Strategies like buying straddles or strangles could be effective for capitalizing on potential price shifts in the upcoming weeks, whatever the direction may be. Create your live VT Markets account and start trading now.

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