The Australian dollar (AUD) declined against the U.S. dollar (USD) on Tuesday, reversing some of the gains from the previous day when AUD/USD rose more than 0.50%. The pair hovered near 0.6450 as market participants digested recent interest rate decisions from the Reserve Bank of Australia (RBA) and the People’s Bank of China (PBoC).
At its May monetary policy meeting, the RBA cut its official cash rate (OCR) by 25 basis points from 4.1% to 3.85%. The decision was widely expected by the market and aimed to balance inflation control with economic support.
RBA Governor Bullock’s Cautious but Confident Stance
In the post-meeting press conference, RBA Governor Michelle Bullock emphasized the importance of maintaining inflation within target ranges. She described the rate cut as a proactive and confidence-driven measure suited to the current economic environment. Governor Bullock also noted the central bank’s readiness to act further if economic conditions require, hinting at possible future adjustments.
Impact of China’s Loan Prime Rate Cut on AUD
The PBoC also cut its loan prime rates on Tuesday, reducing the one-year LPR from 3.10% to 3.00% and the five-year LPR from 3.60% to 3.50%. Given China’s status as Australia’s largest trading partner, changes in Chinese monetary policy can materially influence the AUD’s strength.
This easing by China adds downward pressure on the Australian dollar due to expectations of slower Chinese growth and weaker commodity demand.
Political Turmoil Weighs on Australian Dollar
Further weighing on the AUD was recent political instability in Australia. The opposition coalition fractured after the National Party withdrew from its alliance with the Liberal Party. This upheaval has strengthened the ruling Labor Party, which is consolidating power amidst the opposition’s turmoil.
Political uncertainty tends to weigh on currency markets, and the AUD’s vulnerability has increased in this context.
Market Background: US Credit Downgrade and Its Effects
On Monday, the AUD/USD had strengthened as the US dollar weakened following Moody’s downgrade of the US sovereign credit rating from Aaa to Aa1. This downgrade follows previous reductions by Fitch in 2023 and Standard & Poor’s in 2011.
Moody’s warned of rising US federal debt projected to reach about 134% of GDP by 2035 and an expanding budget deficit nearing 9% of GDP. These fiscal concerns have led to some USD weakness, temporarily benefiting commodity currencies like the AUD.
Technical Analysis: AUD/USD Near 0.6450 with Bullish Momentum
From a technical perspective, AUD/USD traded around 0.6450 on Tuesday. The pair remains supported by its 9-day exponential moving average (EMA) at approximately 0.6429. The 14-day Relative Strength Index (RSI) remains above 50, signaling ongoing upward momentum.
Resistance levels: Immediate resistance is at 0.6515, the six-month high recorded on December 2, 2024. A sustained move above this level could open a path towards the seven-month high of 0.6687 reached in November 2024.
Support levels: Support lies at the 9-day EMA (0.6429) and then the 50-day moving average near 0.6363. Falling below these points may weaken the short- to medium-term outlook and risk a deeper drop toward the March 2020 low near 0.5914.
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