The Australian Dollar (AUD) recovered losses against the US Dollar (USD) amid improved market sentiment as the US signalled possible changes in trade goals. Although the AUD/USD faced difficulties due to a decline in Australia’s Manufacturing PMI to 50.6, challenges in US fiscal policies and Federal Reserve uncertainties may support AUD gains.

Manufacturing Output And Trade Ties

Australia’s manufacturing output hit its lowest since February, attributed to ample inventories and weaker market conditions. Conversely, China’s Caixin Manufacturing PMI rose to 50.4 in June from 48.3, exceeding forecasts, potentially impacting the AUD due to close trade ties between the two nations.

The US Dollar Index is continuing its downtrend, currently around 96.70. The US saw a 2.3% year-over-year rise in the Personal Consumption Expenditures Price Index in May, matching expectations, while core PCE increased to 2.7%.

AUD/USD traded at approximately 0.6560, showing bullish potential due to a strong nine-day Exponential Moving Average and a Relative Strength Index above 50. Key influences include Australia’s interest rates, iron ore prices, China’s economic health, and trade balance statistics. Australia’s largest export, iron ore, plays a critical role in its economy, reflecting AUD value shifts due to price changes.

Although the Australian dollar has managed to claw back some strength against its US counterpart, most of that rebound comes in reaction to restored confidence in the wider markets rather than local production strength. On paper, Australia’s Manufacturing PMI hasn’t seen levels this muted since February, and that alone ought to carry more weight in the currency direction short-term. A reading of 50.6 doesn’t show industry contraction, but it paints a picture of stagnation—barely above the line that separates growth from decline. This doesn’t inspire risk-taking in directionally leveraged positions, especially when local inventories are bloated and consumer demand remains tentative.

Still, what helped the AUD stabilise in recent sessions wasn’t domestic resilience—it was China. A surprise jump in China’s Caixin Manufacturing PMI suggests that demand from Australia’s biggest export market may pick up pace. The June figure came in stronger than expected, and history tells us that when Chinese factory activity recovers, raw material flows from Australia tend to follow suit. That directly feeds into the valuation of Australia’s commodity-reliant currency. There’s nothing speculative about it.

US Dollar Weakness And AUD/USD Outlook

Looking at the US, dollar weakness continues to provide a soft platform under the Australian dollar. The Dollar Index settling closer to 96.70 reinforces this. The market absorbed the May PCE figures without alarm—general inflation climbed 2.3% year-over-year, with core PCE at 2.7%. These figures are steady but not provocative. With no fresh hawkish signals from the Fed, we’re left with a central bank that’s neither ready to tighten nor willing to show its hand too soon. Stagnation breeds policy ambiguity, and ambiguity generally weighs on the currency.

That said, directional volatility is far from absent. The AUD/USD pair holding around the 0.6560 region shows speculative strength, reflected in momentum readings like RSI holding firm above 50. It isn’t just a detached technical narrative driving this; rather, it’s the sum of solid medium-term expectations in commodities—iron ore, in particular—and stable rate differentials. With Australian iron ore exports continuing to shape domestic income and budget positions, we need to monitor developments around iron pricing very closely. Short-term demand upticks in China or logistical changes in Brazil, for example, can shift valuations quicker than most realise.

While iron ore prices haven’t yet exploded higher, their recent stabilisation creates room for price floors in AUD pairs. Combine that with markets gradually easing off long-dollar exposure, and there’s room to the upside, provided economic news at home doesn’t deteriorate sharply. Data will remain heavily scrutinised, especially from China and the commodity sector. Domestic growth alone won’t lift this pair. Disinflation narratives out of the US and signals from Beijing will matter far more in the pricing dynamics over the next few weeks.

With these elements at play, we find ourselves viewing moves through multiple lenses—commodity flows, US fiscal hesitation, and trading flow rebalancing. All of these are digestible through rate expectations and real yield metrics. Taking positions without considering forward guidance shifts or China’s cyclical recovery could result in flawed risk weighting.

Therefore, as we go forward, the better approach is to pay less attention to headline sentiment and more to the underlying causes—like iron ore spot shifts, Chinese industrial orders, and auction demand of US Treasury yields. These have led price reactions more so than official statements. Confidence in macro positioning needs to be matched with reasoned trade sizing and awareness of US economic schedule risks. The next few CPI and NFP releases should be anticipated, not waited upon.

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