AUD/USD extends its gains for the third successive session, trading around 0.7040 during the Asian hours on Thursday. The pair appreciated after hotter-than-expected Australian inflation data, released on Wednesday, lifted the odds of a Reserve Bank of Australia (RBA) rate hike as early as next week.
Markets now price in over a 70% chance of a 25 basis points (bps) hike by the RBA from the 3.6% cash rate, up from 60% before the release, with rates fully priced at 3.85% by May and around 4.10% by September.
Australia’s CPI rose by 3.8% year-over-year (YoY) in December, following a 3.4% increase prior. The market consensus was for 3.6% growth in the reported period. Australia’s RBA Trimmed Mean inflation increased to 0.2% month-over-month (MoM) and 3.3% year-over-year (YoY). The monthly CPI rose 1.0% in December, up from 0% previously and above the 0.7% forecast.
Australia’s export prices rose 3.2% quarter-on-quarter (QoQ) in Q4 2025, rebounding from a 0.9% fall in Q3 and marking the first increase in three quarters, as well as the strongest gain in a year. Meanwhile, Import prices climbed 0.9%, beating expectations for a 0.2% decline and reversing a 0.4% drop in Q3.
The upside of the AUD/USD pair could be restrained as the US Dollar (USD) strengthens after US Treasury Secretary Scott Bessent reiterated the US commitment to a strong USD policy. The US Federal Reserve (Fed) kept interest rates unchanged at its January meeting on Wednesday, pointing to still-elevated inflation and resilient economic growth.
Fed Chair Jerome Powell noted during the post-meeting press conference that job gains have moderated and the unemployment rate has shown signs of stabilization, adding that the Fed is “well positioned” to assess incoming data on a meeting-by-meeting basis and remains off a preset path for future rate decisions.
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.
