Australian Dollar rises amid Chinese CPI preview

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AUD/USD gains ground after remaining flat in the previous day, trading around 0.6930 during the Asian hours on Thursday. The currency pair gains ground as the Australian Dollar (AUD) finds support ahead of critical consumer inflation data from China, Australia's primary trading partner.

AUD/USD strengthens as the Australian Dollar finds support before Chinese inflation data.
FOMC Meeting Minutes reveal policymakers are split over keeping the 3.6% interest rate steady or raising it.
Escalating US-Iran conflict fuels safe-haven demand and pushes rate hike expectations past 30%.

Meanwhile, the US Dollar (USD) faces headwinds following the release of Wednesday's Federal Reserve (Fed) Meeting Minutes. The committee remains deeply divided over the trajectory of inflation, specifically whether it will remain sticky or begin to cool as geopolitical conflict in the Middle East eases.

Notably, during Kevin Warsh’s debut meeting as FOMC Chairman on June 16-17, policymakers were split: while many participants noted the benchmark rate would likely finish the year unchanged or slightly below its current 3.6% level, an equally vocal contingent argued that rates would need to move higher by year-end.

However, the Greenback's downside may be limited. Renewed tensions between the US and Iran are stoking energy-driven inflation fears, boosting safe-haven demand for the USD. This geopolitical friction has reinforced expectations that the Fed may lock in higher interest rates for longer to combat stubborn price pressures. According to the CME FedWatch tool, swap traders have raised the probability of a rate hike at the next Fed meeting to over 30%, a sharp jump from less than 20% just last week.

Adding fuel to the fire, Donald Trump stated on Thursday that an interim agreement to end the conflict with Iran was officially "over." The US President also threatened a second day of airstrikes and vowed to reimpose a US naval blockade in retaliation for recent attacks on oil tankers transiting the Strait of Hormuz.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.

How does the health of the Chinese Economy impact the Australian Dollar?

China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.

How does the price of Iron Ore impact the Australian Dollar?

Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.

How does the Trade Balance impact the Australian Dollar?

The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.