The AUD/USD pair rebounded early Thursday, recovering from a two-year low of 0.6200. This came after a brief pause in the US Dollar’s uptrend, driven by the Federal Reserve’s unexpected hawkish stance. However, ongoing concerns about China’s sluggish economic recovery and upcoming tariff changes under former President Donald Trump weigh on the Australian Dollar’s outlook.
AUD/USD Hits 24-Month Low Following Fed Decision
The Australian Dollar slid to its lowest level in two years against the US Dollar, reaching 0.6200. The Federal Reserve’s latest interest rate cut of 0.25% sparked this decline. The US central bank also forecasted fewer rate cuts next year, adding downward pressure on the AUD/USD pair.
Fed Chair Jerome Powell explained the shift in strategy, saying:
“Today was a closer call but we decided it was the right call.”
Powell also highlighted inflation risks, adding:
“We’re closer to the neutral rate, which is another reason to be cautious about further moves.”
These comments rattled global markets, further complicating the outlook for AUD/USD.
Australian Dollar Faces Dual Pressures
The Australian Dollar suffered not only from the Fed’s cautious approach but also from domestic and external challenges. Weak Chinese growth data and uncertainty surrounding Trump’s tariff policies have amplified the AUD/USD struggles.
Kyle Rodda, a senior financial market analyst at Capital.com, noted:
“The US Dollar leapt, with the AUD/USD, already strangled by weaker domestic and Chinese growth, hit the 62 handle.”
Additionally, Rodda pointed out the market reaction to the Federal Reserve’s revised outlook:
“The Fed’s projection for only two cuts in 2025 brought forecasts in line with market rates, which have long implied a higher trough and neutral rate.”
Also Read: ASX News Today: AUD Falls, ASX 200 Struggles
ASX 200 Falls in Tandem
The ASX 200 also suffered significant losses, falling 1.7% by midday Thursday. This marked its lowest level since November’s first week. The Federal Reserve’s policy decisions and global market jitters impacted Australian stocks, reflecting the same economic headwinds that weigh on the AUD/USD.
The Dow Jones Industrial Average plummeted by over 1,100 points overnight, with the Nasdaq Composite dropping 3.5%. These losses reverberated in the Australian market, further eroding investor confidence.
Slight Relief Against the Kiwi Dollar
Amid the broader turbulence, the Australian Dollar found some relief against the New Zealand Dollar. The Kiwi faced steep losses due to New Zealand’s recession, with GDP falling 1% in the September quarter. This provided limited support for the AUD/USD, but the recovery remained capped by broader economic concerns.
Impact on Travellers and Trade
The AUD/USD fall to 0.6200 has significant implications for travellers and businesses. Australians travelling abroad face higher costs as the exchange rate plunges. Meanwhile, exporters could benefit from a weaker Australian Dollar, although global economic uncertainties might limit these gains.
Fed Chair Powell emphasised the need for a cautious approach, saying:
“With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive. We can therefore be more cautious as we consider further adjustments to our policy rate.”
Trump’s Policies Add to Uncertainty
The Federal Reserve also considered potential inflationary pressures from Donald Trump’s policy agenda. Trump’s plans for low taxes and higher tariffs could influence monetary policy in the coming years.
Powell addressed this dynamic, stating:
“Monetary policy has changed since President-elect Donald Trump won the election. He is likely to bring in a low tax, higher tariff environment which the board says could be inflationary.”
This backdrop adds further complexity to the AUD/USD outlook, with market participants closely watching policy developments.
Hawkish Fed Shifts Market Dynamics
The Federal Reserve’s surprise move caught markets off guard, sparking risk-off sentiment. Investors adjusted their expectations for the rate-cutting cycle after the Fed indicated a slower pace of reductions.
Rodda elaborated on the market’s reaction:
“The emphasis on upside risks to inflation, the likelihood of a prolonged pause in further cuts and some degree of a higher-for-longer dynamic spooked investors and catalysed risk-off moves.”
This shift in sentiment caused significant fluctuations in the AUD/USD, with the pair struggling to regain lost ground.
Outlook for AUD/USD
The AUD/USD pair remains vulnerable to global economic and policy shifts. While the recent rebound from 0.6200 offers a glimmer of hope, challenges persist. Sluggish growth in China, hawkish Fed policies, and uncertainties surrounding Trump’s tariffs continue to weigh on the Australian Dollar.
The path forward depends on several factors, including the Federal Reserve’s next moves and China’s economic recovery trajectory. For now, traders will monitor developments closely, as the AUD/USD navigates an uncertain landscape.
Conclusion
The AUD/USD pair’s journey to a 24-month low reflects the confluence of domestic and global pressures. While a pause in the US Dollar’s rally provided temporary relief, challenges remain. Market participants should prepare for continued volatility as economic and political factors shape the AUD/USD outlook.
