The US dollar and the Australian dollar benefit from eased US-China trade tensions. Analysts suggest AUD/USD may gain support amid the USD’s economic challenges.

Australia’s slowing first-quarter core inflation may allow the Reserve Bank of Australia to make a 25 basis point rate cut on 20 May. The US-China trade news should not alter easing plans, but market expectations for four cuts by year-end may be excessive.

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With some of the pressure between Washington and Beijing easing, we’re seeing risk-sensitive currencies like the Australian dollar strengthen slightly against the greenback. This is not unexpected; when tension cools off between major trading blocs, the tendency is for commodity-linked currencies to find firmer ground. What’s operative now, though, is how this shift interacts with other crosscurrents—especially central bank expectations and hard data.

The core inflation print in Australia’s first quarter has come in lighter than what was priced in. This opens the door, at least theoretically, for the Reserve Bank to move ahead with a modest rate cut. The Board meets again on 20 May, and a reduction of 25 basis points seems plausible at this point. Markets, however, have begun leaning into a much more aggressive easing cycle—some even expecting as many as four cuts by December. That degree of adjustment assumes ongoing softness not only in inflation but also in labour market figures and broader consumption. We would caution against leaning too heavily into that forecast, especially given recent resilience in export sectors and positive shifts in external demand.

US Economic Considerations

On the US side, the dollar has shown subtle signs of softening amidst growing doubts around the Federal Reserve’s ability to hold rates unchanged deep into the second half of the year. Subdued hiring momentum and slower wage growth in recent reports have started to chip away at the belief that Fed Chair Powell will keep policy tight through Q4. Should upcoming CPI and retail data disappoint, any perceived stability in the dollar may wobble further—and that brings volatility back into high-beta currency pairs.

It’s worth remembering that monetary settings are not operating in a vacuum. External drivers—like freight costs, commodity swings, and geopolitical reratings—still play a direct role in relative strength. Traders will need to assess whether short-term gains in AUD/USD are being sustained by fundamentals or simply drifting with thinner market sentiment.

For us, the key questions moving into the second half of the month revolve around how far central banks are willing to move before they start pushing against their own mandates. Neither the RBA nor the Fed has an appetite for missteps driven by market overconfidence. We’ll be scrutinising policy language closely, not just the rate decisions themselves. Forward guidance, or the lack thereof, could end up being the more powerful driver of pricing behaviour near term.

Those trading options or configuring spreads should take cues not only from implied volatility but also from skew dynamics on both sides of the pair. Premium positions are becoming more expensive on the downside for the dollar, which reflects increasing hedging interest against US economic underperformance.

Ultimately, whether one is looking to play directional moves or relative value opportunities, it’s going to require flexibility and a fast reaction time. Macro surprises are more likely to produce knee-jerk responses that reverse quickly. We’ll be tracking those retracements as chances to re-enter positions rather than as trend reversals in their own right.

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