The Australian dollar (AUD) gained ground against the US dollar (USD) on Wednesday, building on a more than 1% rise from the day before. The AUD/USD pair has remained stable, helped by an increase in China’s Services Purchasing Managers’ Index (PMI), which climbed to 52.3 in January, up from December’s 52.0. This was better than the anticipated 51.8. Given that China is a key trading partner for Australia, shifts in the Chinese economy can significantly influence the Australian dollar.
The boost in the AUD followed the release of seasonally adjusted S&P Global PMI data, which showed Australia’s composite PMI rising to 55.7 in January, a notable increase from 51.0 in December. This expansion marks the strongest economic growth in the last 45 months. Additionally, the Services PMI surged from 51.1 to 56.3, the highest since February 2022, surpassing the preliminary estimate of 56.0, and remaining above the important 50.0 mark—indicating that service activity has been expanding for two years now.
On Tuesday, the Reserve Bank of Australia (RBA) increased the Official Cash Rate (OCR) by 25 basis points to 3.85%, citing stronger-than-expected growth and a robust inflation outlook. As this tightening cycle begins, markets have raised the likelihood of a rate hike in May to 80% and are currently factoring in around 40 basis points of tightening for the rest of the year.
RBA Governor Michelle Bullock stated in a post-meeting press conference that inflationary pressures are still quite pronounced and warned it would take longer to re-align with targets, emphasizing that the board would continue relying on data, steering clear of any forward guidance.
US dollar remains stable after recent declines
- The US dollar index (DXY), which tracks the value of the US dollar against six major currencies, displayed weakness for a second consecutive day, hovering around 97.40 as of the latest update. Market attention will soon shift to the Institute for Supply Management’s (ISM) Services PMI, anticipated to drop to 53.5 in January from December’s 54.4.
- Due to a partial government shutdown that began last weekend, the Bureau of Labor Statistics (BLS) will not release its January employment report on Friday as initially planned. The shutdown concluded late Tuesday after President Trump signed a funding agreement with Senate Democrats, despite ongoing immigration-related tensions.
- Data released on Monday revealed an unexpected rise in U.S. factory activity, with the ISM Manufacturing PMI increasing from 47.9 in December to 52.6, exceeding market predictions of 48.5 and illustrating the economy’s resilience.
- President Trump has nominated Kevin Warsh to serve as the next Chairman of the Federal Reserve Board. Markets view his nomination as an indication of a potentially more cautious approach to monetary easing.
- According to Politico, the dollar gained traction as risk sentiment improved after the U.S. Senate reached a consensus on advancing a government funding package, which helped avert a shutdown.
- US producer-side inflation remained solid, moving further away from the Federal Reserve’s 2% target, tightening the central bank’s policy stance. The U.S. PPI inflation rate in December held steady at 3.0%, matching the same month the previous year, and remained above expectations of moderating to 2.7%. Core PPI, excluding food and energy, increased from 3.0% to 3.3% year-on-year, contradicting forecasts for a drop to 2.9%, signaling persistent price pressures.
- St. Louis Fed President Albert Moussallem stated that further rate cuts are not justified at this point and described the current policy rate range as roughly neutral at 3.50% to 3.75%. Similarly, Atlanta Fed President Rafael Bostic emphasized patience, suggesting that monetary policy should stay moderately restrictive.
- Australia’s RBA reported monthly average inflation rising to 0.2% month-on-month and 3.3% year-on-year. The CPI increase in December hit 1.0%, up from no increase previously, exceeding the expected 0.7% rise.
- Australia’s export prices increased by 3.2% quarter-on-quarter in Q4 2025, recovering from a 0.9% decline in Q3, marking the first significant rise in three quarters. On the other hand, import prices rose 0.9%, outperforming expectations for a 0.2% drop and reversing a 0.4% decline in the previous quarter.
- China’s Rated Dog Manufacturing PMI stood at 50.3 in January, up from 50.1 in December, aligning with expectations. The recent results indicated slight factory activity expansion, the highest growth rate since October of the previous year.
- Australia’s TD-MI inflation gauge increased by 3.6% year-on-year in January, slightly up from 3.5%. Month-over-month inflation saw a modest 0.2% rise, significantly slowing from a two-year high of 1% in December, the slowest increase since August.
- ANZ job advertisements surged by 4.4% month-on-month in December 2025, bouncing back from a revised decline of 0.8%, marking the first uptick since July. This increase is also the highest monthly rise since February 2022, suggesting renewed hiring momentum as the year comes to a close.
Australian dollar approaches three-year high near 0.7100
The AUD/USD pair was trading around 0.7030 on Wednesday. Analysis of the daily chart indicates that the pair continues to operate within an ascending channel, suggesting a bullish sentiment. The RSI is at 73.30, generally signaling strong upward momentum, although it might also imply that momentum is increasing.
The AUD/USD pair has bounced back towards 0.7094, its highest level since February 2023, reached on January 29th. Should prices break above this mark, it may allow the AUD/USD to test the channel’s upper border around 0.7210. On the other hand, key support is found at the 9-day EMA, presently at 0.6964, which aligns with the channel’s lower boundary. If the pair declines further, the 50-day EMA could provide support at 0.6759.
