The Australian Dollar strengthens as the US Dollar weakens amid fading concerns over inflation spikes

The Australian Dollar (AUD) rebounded on Monday, ending a six-day losing streak as the US Dollar (USD) softened following the release of January’s Personal Consumption Expenditures (PCE) inflation data on Friday. The report aligned with market expectations, easing concerns about unexpected inflation spikes in the US.

Australia’s TD-MI Inflation Gauge fell by 0.2% month-over-month in February, reversing a 0.1% increase in January. This marked the first monthly decline since August 2023 and reflected a continued slowdown in underlying inflation. The drop follows the Reserve Bank of Australia's (RBA) decision to cut its cash rate by 25 basis points to 4.1% at its first monetary policy meeting of the year. However, on an annual basis, the inflation gauge rose by 2.2%, slightly below the previous reading of 2.3%.

In addition, positive economic data from China provided further support for the AUD. China’s Caixin Manufacturing Purchasing Managers' Index (PMI) rose to 50.8 in February from 50.1 in January, surpassing expectations of 50.3. As China is a key trading partner for Australia, stronger manufacturing activity in China boosted confidence in the Australian economy, supporting the AUD.

Trade Tensions and Geopolitical Risks Weigh on AUD

Despite these positive factors, the Australian Dollar’s upside remains limited by escalating US-China trade tensions. Over the weekend, US President Donald Trump announced an additional 10% tariff on Chinese imports, set to take effect on Tuesday. This follows a previous 10% tariff hike imposed last month. Additionally, Trump stated on Truth Social that 25% tariffs on Canadian and Mexican goods will be implemented on March 4.
Further geopolitical risks emerged as tensions escalated between President Trump and Ukrainian President Volodymyr Zelenskyy during peace negotiations. A planned agreement granting the US greater access to Ukraine’s rare earth minerals was abandoned after a heated exchange between the two leaders, leading top US advisers to request Zelenskyy’s departure from the White House.
In a move aimed at limiting Chinese influence, President Trump signed a memorandum on Friday directing the Committee on Foreign Investment in the United States (CFIUS) to restrict Chinese investments in strategic sectors. A White House official cited by Reuters stated that the national security memorandum seeks to balance foreign investment with protecting US national security interests from potential threats posed by China.
The US Dollar Index (DXY), which tracks the USD against a basket of major currencies, declined after three consecutive days of gains, hovering around 107.30 at the time of writing. However, downside pressure on the Greenback may be limited as US Treasury yields rise, with the 2-year and 10-year Treasury yields standing at 4.02% and 4.24%, respectively.
The US PCE inflation report met expectations, with the monthly headline PCE holding steady at 0.3%. Core PCE rose slightly to 0.3% from 0.2% in December, while the annual headline PCE remained unchanged at 2.6%, slightly exceeding projections. Core PCE eased to 2.6%, down from a revised 2.9% in December, reinforcing the view that inflation remains under control.

Australian Dollar Faces Key Technical Levels

The Australian Dollar is testing key technical levels, with the AUD/USD pair trading around 0.6220 on Monday. Technical analysis suggests that the pair remains under pressure, trading below the nine- and 14-day Exponential Moving Averages (EMAs), signaling weakening short-term momentum. The 14-day Relative Strength Index (RSI) remains below 50, reinforcing the bearish bias.

On the downside, the AUD/USD pair is currently testing the critical psychological support level at 0.6200. A decisive break below this level could push the pair toward 0.6087, its lowest level since April 2020, recorded on February 3.

Resistance is initially seen at the nine-day EMA of 0.6280, followed by the 14-day EMA at 0.6290. A breakout above these levels could strengthen short-term momentum, potentially leading to a retest of the three-month high at 0.6408, reached on February 21.