• The Australian Dollar extends gains as trade war fears pressure the Greenback.
• European leaders warn of retaliation after Trump’s tariff threat.
• China’s upbeat GDP data and RBA rate hike speculation provide additional tailwinds.

The Australian Dollar (AUD) edges higher against the US Dollar (USD) on Tuesday, as investors trim exposure to the Greenback amid rising tensions between the United States and the European Union (EU). At the time of writing, AUD/USD trades around 0.6744, extending gains for a second straight day.

The US Dollar is being undermined by renewed 'Sell America' sentiment after US President Donald Trump threatened fresh tariffs on eight European countries as part of his latest push to secure control of Greenland.

European leaders have pushed back strongly against the tariff threat, warning that retaliatory measures could be taken. The escalation has revived fears of a broader trade war and raised the risk that the European Union could suspend the EU-US trade deal agreed last year.

Earlier on Tuesday, US officials doubled down on the administration’s trade stance. US Trade Representative Jamieson Greer said President Trump’s Greenland-related tariff threat is an “appropriate use of tariffs,” adding that the European Union has “done nothing” to implement the US-EU trade deal. Meanwhile, US Commerce Secretary Howard Lutnick warned that if Europe retaliates, the United States would respond, saying it would become a “tit-for-tat” situation.

However, the legality of President Trump’s tariffs remains uncertain. The US Supreme Court declined to rule on the measures on Tuesday, suggesting that the legal challenge to his trade policy could take at least another month to resolve. With the court entering a four-week recess, the next possible ruling date is February 20.

Meanwhile, Chinese data has offered an additional tailwind for the Aussie, given Australia’s heavy trade reliance on China. On Tuesday, the People’s Bank of China left its benchmark interest rate unchanged at 3%. Earlier, data released on Monday showed China’s economy grew by 1.2% QoQ in the fourth quarter, beating expectations of 1%, while annual Gross Domestic Product (GDP) rose 4.5% YoY above forecasts of 4.4%.

On the monetary policy front, speculation is building that the Reserve Bank of Australia’s (RBA) next move could be a rate hike at its February meeting. Attention now turns to Australia’s employment data due Thursday, which could influence near-term expectations.

In the United States, the Federal Reserve (Fed) is widely expected to keep interest rates unchanged at its January 27-28 meeting, though markets continue to price in two rate cuts later this year.

Traders are now looking ahead to upcoming US data, including the Personal Consumption Expenditures (PCE) inflation report and the advance estimate of third-quarter annualized GDP due on Thursday.