The US Dollar is on the back foot right now, and the Australian Dollar is quietly cashing in on that weakness. The trigger is a softer than expected batch of jobs data, the Non Farm Payrolls (NFP), which has forced markets to walk back their bets on aggressive action from the Federal Reserve. When traders sense that interest rates will not climb as quickly, the Dollar loses some of its shine, and currency pairs like AUD/USD are the direct beneficiaries. In the current session AUD/USD is trading around 0.6959, up roughly 0.32 percent from the previous close of 0.6937.
The picture is not entirely one sided, though. Fresh services sector data out of the US came in fairly resilient, and that has cushioned the Dollar's slide. That is precisely why the Australian Dollar's advance has stayed within a narrow band rather than turning into a runaway rally.
What the US services data is telling us
Business activity in the American services sector cooled slightly in June, but it is still firmly in expansion territory. The ISM Services PMI for June printed at 54, a touch below the previous 54.5 but bang in line with estimates. Since any reading above 50 signals expansion, a figure of 54 still paints a healthy picture.
The sub-components of the survey tell an even more interesting story. The Prices Index eased from 71.3 to 67.7, hinting that inflationary pressure is softening a little. On the other side, the Employment Index rebounded from 47.9 to 51.2, which means it climbed out of contraction and back into expansion. It is this improvement on the jobs front that has stopped the Dollar from weakening across the board.
The RBA stance and the data ahead
The minutes from the Reserve Bank of Australia (RBA) have also lent a hand to the Aussie. Those minutes keep the risk of further tightening alive, provided inflation proves sticky. It is this hawkish lean from the central bank that capped some of AUD/USD's initial losses.
The economic calendar is light this week, meaning few major releases. Traders will now turn their attention to the Westpac Consumer Confidence reading for July, due on July 13, followed by the update on Consumer Inflation Expectations for the same period.
The technical picture: a bearish lean remains
Looking at the daily chart, the near-term bias for AUD/USD is still tilted toward weakness. According to the latest live data the pair is sitting around 0.6959, holding below an important cluster of moving averages. The 50-, 100- and 200-day simple moving averages are bunched together near 0.7091, and price is trading under them. The levels that once served as upward trend-line supports have broken and flipped into overhead supply, which means former structural floors have now turned into resistance.
The momentum gauge, the Relative Strength Index (14), is currently around 44, leaning to the weak side. That suggests downside pressure is still in play, even though the recent slide looks more like a modest loss of momentum than a sharp capitulation.
On the way up, the first hurdle appears around the broken long-term trend-line area near 0.7002. Above that sits a denser cap, where the former trend-line supports and the moving average cluster overlap roughly between 0.7086 and 0.7111. For the tone to turn constructive and ease the current weakness, price would need to reclaim this band.
Below current levels, the provided data shows no clearly defined structural floor sitting immediately underneath. That means if the decline extends, AUD/USD may have to hunt for fresh demand at some lower level. As long as price stays under the resistance band described above, the risks remain tilted to the downside.
What actually drives the Australian Dollar
To make sense of the Aussie, it helps to know the forces that move it. The single biggest factor is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country, the price of its biggest export, Iron Ore, is another key driver. On top of that, the health of China's economy, Australia's largest trading partner, along with domestic inflation, the growth rate and the Trade Balance, all matter. Market sentiment plays a big role too, whether investors are chasing riskier assets (risk-on) or seeking safe-havens (risk-off). A risk-on mood is positive for the Australian Dollar.
The role of the RBA
The Reserve Bank of Australia sets the level of interest rates at which Australian banks lend to one another, and that in turn shapes interest rates across the whole economy. The RBA's main goal is to keep inflation stable within a 2 to 3 percent band by nudging rates up or down. Relatively high interest rates compared with other major central banks tend to support the Australian Dollar, while relatively low rates do the opposite. The bank can also deploy quantitative easing and tightening to influence credit conditions, with the former negative for the currency and the latter positive.
How China and Iron Ore feed in
China is Australia's largest trading partner, so the health of the Chinese economy has a major bearing on the value of the Australian Dollar. When China is doing well, it buys more raw materials, goods and services from Australia, lifting demand for the currency and pushing its value up. When Chinese growth disappoints, the reverse happens. That is why positive or negative surprises in Chinese growth figures often show up directly in the Aussie and its pairs.
Iron Ore is Australia's largest export. According to data from 2021, it accounts for 118 billion dollars a year, with China as its primary destination. The price of Iron Ore can therefore be a driver of the Australian Dollar. Generally, when the price of Iron Ore rises, the Aussie goes up with it as overall demand for the currency increases, and it falls when Iron Ore prices drop. Higher Iron Ore prices also raise the odds of a positive Trade Balance for Australia, which is itself a plus for the currency.
Why the Trade Balance matters
The Trade Balance is the difference between what a country earns from its exports and what it pays for its imports, and it is another factor that shapes the Australian Dollar. If Australia produces goods that are in strong global demand, its currency gains value purely from the surplus demand created by foreign buyers. A positive net Trade Balance therefore strengthens the Australian Dollar, while a negative balance drags it down.
