Australian Dollar Holds Ground Amid Tariff Concerns and Weak Chinese Data

The Australian Dollar (AUD) remains resilient despite prevailing market caution fueled by US tariff measures and disappointing economic data from China. The AUD/USD pair hovers around 0.6215, managing to defend its mild gains after briefly hitting a two-week low. However, concerns over potential trade tensions and dovish expectations for the Reserve Bank of Australia (RBA) continue to cap the upside.

Market Sentiment and Key Drivers

Investor sentiment remains fragile as the United States reconfirms its tariff plans. The US administration has announced a 25% tariff on Canadian and Mexican imports and a 10% levy on Chinese goods, effective February 1. These protectionist measures have dampened global risk appetite, putting additional pressure on the Australian Dollar.

Meanwhile, China’s latest Purchasing Managers' Index (PMI) data showed weak economic activity. The manufacturing sector remains in contraction, while the services sector barely expanded. Given Australia's close economic ties with China, these developments negatively impact the Aussie’s performance.

On a positive note, iron ore prices continue to rally, hitting yearly highs, which offers some support to the Australian Dollar. However, concerns over China’s weakening demand limit the AUD’s ability to capitalize on these gains.

Monetary Policy Expectations and US Data Impact

Market participants largely expect the RBA to cut interest rates in February, adding to the Australian Dollar's weakness. On the other hand, the US Federal Reserve remains cautious, as the latest Personal Consumption Expenditures (PCE) Price Index showed inflation rising 0.3% month-over-month in December, in line with market expectations.

With annual core PCE inflation steady at 2.8% YoY, markets now anticipate that the Fed will refrain from cutting rates in March, supporting the US Dollar.

Technical Outlook: AUD/USD Struggles for Direction

The AUD/USD pair remains trapped in a narrow range, with resistance at 0.6230 and support at 0.6200. The Relative Strength Index (RSI) at 42 signals weak momentum, while the MACD histogram suggests fading bullish strength.

If the pair breaks below 0.6200, further downside could follow, while a push above 0.6230 may provide short-term relief. However, broader market uncertainties and rate cut expectations could limit AUD’s recovery potential.