The Australian dollar (AUD) continued its decline against the US dollar (USD) for the third consecutive session on Friday. This drop was driven by widespread selling in global equities and other risk-sensitive assets. The AUD, closely tied to commodity prices and investor risk sentiment, fell as a tech-led sell-off raised concerns over hefty AI investments and undermined confidence.
Comments by Reserve Bank of Australia (RBA) Governor Michelle Bullock suggested that an increase in the Official Cash Rate (OCR) indicated a more constrained productive capacity of the economy than previously thought, necessitating tighter policy. Bullock pointed out that the RBA may need to curb demand growth unless supply capacity increases more rapidly.
Recent trade balance data revealed that Australia’s trade surplus widened to A$3.373 billion in December 2025, up from a revised A$2.597 billion in November, slightly exceeding expectations of A$3.3 billion. Exports rose by 1.0% month-on-month in December, bouncing back from a 4.0% drop in November, mainly due to metal ores and minerals. Imports, however, fell by 0.8% from the previous month, which was significantly lower than an earlier estimate of a 0.2% decline.
This past Tuesday, the RBA raised the Official Cash Rate (OCR) by 25 basis points to 3.85%, citing better-than-anticipated growth and a solid inflation outlook. As the tightening cycle kicks off, markets have raised the likelihood of a rate hike in May to 80%, with expectations for around 40 basis points of further tightening later this year.
US dollar declines after consecutive gains
- The US Dollar Index (DXY), which measures the dollar against six major currencies, fell back to around 97.90 after two days of gains.
- Traders are looking forward to the Michigan Consumer Confidence Index for February, set to be released during late North American trading.
- The dollar weakened in response to recent labor data indicating a cooling job market, prompting more dovish Fed expectations. Markets foresee two rate cuts beginning this June, with another possible cut in September.
- The CME’s FedWatch tool suggests a nearly 77.3% chance that the Federal Reserve will keep rates steady at its March meeting and initiate its first rate cut in June.
- According to the U.S. Department of Labor, new jobless claims reached 231,000 for the week ending January 31, surpassing expectations of 212,000 and a previous estimate of 209,000. Additionally, ADP reported a mere 22,000 jobs were added in the private sector in January, significantly below forecasts of 48,000 and a prior estimate of 37,000 (revised from 41,000).
- Federal Reserve President Lisa Cook expressed her reluctance to support further rate cuts without clear signs of easing inflation, noting that she is more worried about sluggish disinflation rather than weak labor markets.
- The nomination of Kevin Warsh as Fed chair was also a topic of interest among investors, particularly due to his preference for a smaller balance sheet and a less aggressive stance on interest rate reductions. Meanwhile, U.S. President Donald Trump commented he wouldn’t have nominated Warsh if he favored raising rates, stating there’s not much doubt that the central bank would lower rates as “our interest rates are so high” but now “we’re a rich country again.”
- ADP Employment Changes reported only a 22,000 increase in private sector jobs for January, falling short of expectations for a 48,000 increase and the previous estimate of 37,000 (revised from 41,000), further emphasized by the delayed official government data release.
- China’s Services Purchasing Managers Index (PMI) improved to 52.3 in January from 52.0 in December, surpassing the anticipated 51.8. Given that China is Australia’s major trading partner, shifts in its economy can significantly influence the Australian dollar.
- Australia’s S&P Global Composite PMI reached 55.7 in January, rising from 51.0 in December, marking the most robust economic expansion in 45 months. The Services PMI also climbed from 51.1 to 56.3, the highest since February 2022, beating the preliminary estimate of 56.0 and remaining above the crucial 50.0 mark, extending service activity growth for two years.
Australian dollar hovers near 0.6900 after slipping below 9-day EMA
The AUD/USD pair traded around 0.6910 on Friday. Daily chart analysis indicates it’s below an ascending channel pattern, hinting at a potential bearish reversal. Yet, the 14-day relative strength index (RSI) stands at 57, indicating that bullish momentum persists.
There’s potential for the AUD/USD pair to test immediate resistance at the 9-day exponential moving average (EMA) of 0.6946. A rebound within this ascending channel could reinforce bullish trends, targeting 0.7094, the highest recorded since February 2023 on January 29. A break above this level would support tests of the channel’s border around 0.7270, while on the downside, key support is at the 50-day EMA at 0.6771.
