AUD/USD holds ground after registering modest losses in the previous session, trading around 0.6680 during the Asian hours on Wednesday. The pair may further weaken as the US Dollar (USD) advances despite the softer inflation in the United States (US), hinting that the Federal Reserve (Fed) could indeed reduce interest rates as priced in by the financial markets.
US Core Consumer Price Index (CPI), excluding food and energy, rose 0.2% in December, below market expectations, while annual core inflation held at 2.6%, matching a four-year low. The data provided a clearer sign of easing inflation after earlier releases were skewed by shutdown effects. However, last Friday’s strong Nonfarm Payrolls report, a dip in the Unemployment Rate, and a solid four-week average ADP Employment Change point to a resilient labor market.
However, the AUD/USD pair could gain ground as the Australian Dollar (AUD) may find support from rising expectations of further rate hikes by the Reserve Bank of Australia (RBA), following a solid rebound in Australia’s Building Permits data.
Seasonally adjusted approvals for total dwellings in Australia surged 15.2% month-on-month to a near four-year high of 18,406 units in November 2025, in line with the preliminary estimate. This marked a sharp reversal from the 6.1% decline in the previous month and represented the strongest monthly increase since May 2023.
Persistent strength in housing demand may raise concerns at the RBA, as it could slow progress toward easing inflationary pressures and reinforce expectations of a more restrictive policy stance. This is despite a moderation in November inflation, which remains above the central bank’s target.
Traders will likely observe the Trade Balance data for December later in the day from China, Australia’s close trading partner. Trade balance is expected to widen to $113.60B in December, compared to $111.68B in the previous reading. Exports are expected to rise by 3.0% YoY in December, while Imports are projected to increase by 0.9% YoY during the same period.
Australian Dollar FAQs
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.
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.
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.
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.
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.
