The AUD/USD pair has fallen over 0.5% to around 0.6480 during the European trading session on Tuesday. This drop comes even after a new trade agreement on critical minerals between the US and Australia, which aims to lessen US reliance on China. Currently, trade tensions persist between the US and China, highlighted by China’s export controls on rare earths. In response, the US has raised tariffs on imports from China by 100%, although there are indications that these tensions may be showing signs of easing.

The Impact Of The US Dollar

The US Dollar is on the rise, with the Dollar Index nearing 99.00. This happens even though the Federal Reserve is expected to lower interest rates soon. The FedWatch tool suggests that a 25 basis point cut is almost guaranteed, bringing rates down to between 3.75% and 4.00%. The Australian Dollar is heavily influenced by the Chinese economy, as China is its largest trading partner. Additionally, the price of iron ore, Australia’s top export, significantly affects the AUD’s value. Typically, higher iron ore prices boost the Australian currency. Currently, the AUD/USD pair faces strong pressure, trading around 0.6480 despite the new minerals agreement with the US. This positive local news is being overshadowed by the robustness of the US dollar, as the DXY index approaches the 99.00 mark. The market appears to be prioritizing broader economic trends over smaller trade agreements. Traders should pay attention to the differing paths of the central banks. The Reserve Bank of Australia kept its cash rate steady at 4.35% earlier this month because of persistent inflation. In contrast, almost everyone in the market expects a 25 basis point cut from the US Federal Reserve next week. This widening difference in interest rates favors the Australian dollar but is currently being overlooked, indicating a strong bearish mood.

Factors Affecting The Australian Dollar

The Australian dollar is also facing challenges from its main trading partner and key exports. Recent data showed that China’s Q3 GDP growth was only 4.8%, falling short of expectations. As a result, the price of iron ore has dipped below $110 per tonne, providing little support for the Australian dollar. All attention will be on the delayed US Consumer Price Index (CPI) report set for release this Friday. August’s inflation figure was a stubborn 3.5%, so another high number could complicate the Fed’s rate-cut decision and boost the US dollar further. A lower-than-expected CPI would be crucial for the AUD/USD to have any chance of a short-term recovery. Given this situation, traders might want to prepare for further downside in the AUD/USD pair. Buying put options could provide a defined-risk opportunity to profit from a continued decline, especially if Friday’s US inflation numbers are high. Alternatively, selling out-of-the-money call options or setting up bear call spreads may be wise strategies to take advantage of what seems to be a very limited upside. Create your live VT Markets account and start trading now.

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