The AUD/USD pair maintains its strength after posting modest losses in the previous session, trading around 0.6680 during Asian hours on Wednesday. The pair may weaken further as the US Dollar (USD) advances despite weak inflation in the United States (US), indicating that the Federal Reserve (Fed) can indeed cut interest rates according to their price in the financial markets.
The US core CPI, excluding food and energy, rose 0.2% in December, below market expectations, while annual core inflation held steady at 2.6%, equivalent to a four-year low. The data provided a clearer signal of a decline in inflation after previous releases were skewed by the effects of the lockdown. However, last Friday’s strong non-farm payrolls report, lower unemployment rate, and strong four-week average ADP employment change point to a resilient labor market.
However, the AUD/USD pair may rise as the Australian Dollar (AUD) may find support from rising expectations of an interest rate hike by the Reserve Bank of Australia (RBA), following a strong rebound in Australian building permits data.
Seasonally adjusted approvals for Australia’s total housing stock rose 15.2% month-on-month to reach a four-year high of 18,406 units in November 2025, in line with the preliminary estimate. This represents a sharp reversal from the 6.1% decline in the previous month and represents the strongest monthly increase since May 2023.
Continued strength in housing demand may raise concerns for the RBA, as it could slow progress towards easing inflationary pressures and boost expectations of a more restrictive policy stance. This comes despite moderation in inflation in November, which remains above the central bank’s target.
Traders will likely watch December trade balance data later in the day from China, Australia’s close trading partner. The trade balance is expected to expand to $113.60 billion in December, compared to $111.68 billion in the previous reading. Exports are expected to rise by 3.0% year-on-year in December, while imports are expected to rise by 0.9% year-on-year during the same period.
Frequently asked questions about the Australian dollar
One of the most important 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 major driver is the price of its largest export, iron ore. The health of the Chinese economy, its largest trading partner, is one factor, in addition to Australia’s inflation, its growth rate and its trade balance. Market sentiment – whether investors are snapping up riskier assets (risk on) or looking for safe havens (risk off) – is also a factor, with risk appetite positive for 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 affects the level of interest rates in the economy as a whole. The RBA’s main objective 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 Australian dollar, and relatively low interest rates. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being AUD negative and the latter AUD positive.
China is Australia’s largest trading partner, so the health of the Chinese economy has a major impact on the value of the Australian Dollar (AUD). When the Chinese economy is performing well, it buys more raw materials, goods and services from Australia, which raises demand for the Australian dollar, raising its value. The opposite is the case when the Chinese economy does not grow as quickly as expected. Therefore, positive or negative surprises in Chinese growth data often have a direct impact on the Australian dollar and its crosses.
Iron ore is Australia’s largest export, representing $118 billion annually according to 2021 data, and China is its main destination. Therefore, the price of iron ore could be a driver of the Australian dollar. In general, if the price of iron ore rises, the Australian dollar also rises, as overall demand for the currency increases. The opposite is the case if the price of iron ore falls. Higher iron ore prices also tend to increase the likelihood of a positive trade balance for Australia, which is also positive for the Australian dollar.
The balance of trade, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can affect the value of the Australian dollar. If Australia produces highly sought-after exports, its currency will gain value from the excess demand generated by foreign buyers seeking to buy its exports in exchange for what it spends to buy imports. Therefore, a positive net trade balance strengthens the Australian dollar, with the opposite effect if the trade balance is negative.
