The Australian Dollar's Quiet Trade Amid PBOC's Unchanged LPRs
The Australian Dollar (AUD) has been relatively stable against the US Dollar (USD) on Tuesday, following a modest gain in the previous trading session. This stability comes as the People's Bank of China (PBOC) decided to keep its Loan Prime Rates (LPRs) unchanged, with the one-year and five-year rates remaining at 3.00% and 3.50%, respectively. This decision is significant because any changes in the Chinese economy can have a direct impact on the AUD, given the close trading relationship between the two countries.
However, the AUD/USD pair may soon experience a shift. The US Dollar is facing challenges due to escalating uncertainty over the US-Greenland issue. President Donald Trump's threat to impose tariffs on eight European countries opposing his Greenland acquisition proposal has sparked a response from the European Union (EU). EU ambassadors have agreed to intensify efforts to deter Trump from imposing tariffs and are preparing retaliatory measures.
In other economic news, Australia's TD-MI Inflation Gauge rose to 3.5% year-over-year (YoY) in December, up from 3.2% previously. On a monthly basis, inflation surged to 1.0% month-over-month (MoM), the fastest pace since December 2023, and a sharp acceleration from 0.3% in the prior two months. These inflation figures suggest that the Reserve Bank of Australia (RBA) may need to consider tighter monetary policy.
The AUD could find support as emerging upward price pressures strengthen expectations of tighter monetary policy from the RBA. The International Monetary Fund (IMF) has urged the RBA to remain cautious, noting that inflation has been consistently above the Bank's 2% to 3% target band. Despite a slowdown in headline CPI to 3.4% YoY in November, the lowest since August, it remains above the RBA's target.
The US Dollar Declines Amid Rising US-Greenland Tensions
The US Dollar Index (DXY) is experiencing losses, trading around 99.00 at the time of writing. This decline is partly due to President Trump's announcement of a 10% tariff on goods from Denmark, Sweden, France, Germany, the Netherlands, Finland, Britain, and Norway, effective February 1, until the US is permitted to purchase Greenland. The tariff threat has prompted a response from the EU, with ambassadors agreeing to intensify efforts to deter Trump and prepare retaliatory measures.
US labor market data has also influenced market expectations. Initial Jobless Claims unexpectedly fell to 198K in the week ended January 10, below market expectations, indicating limited layoffs and a robust labor market despite high borrowing costs. The US Core Consumer Price Index (CPI) rose 0.2% in December, below market expectations, while annual core inflation held at 2.6%, a four-year low. These data suggest that inflation is easing, providing a clearer picture after earlier releases were skewed by shutdown effects.
China's economic data is also worth noting. Industrial Production rose 5.2% YoY in December, accelerating from 4.8% in November, supported by resilient export-driven manufacturing activity. Retail Sales rose 0.9% YoY, undershooting forecasts and November's 1.3%. China's Gross Domestic Product (GDP) rose 1.2% quarter-over-quarter in Q4 2025, accelerating from 1.1% in Q3 and exceeding market consensus.
RBA's Outlook and Interest Rate Expectations
RBA policymakers acknowledged that inflation has significantly eased from its 2022 peak but remains above the target band. They expect one additional rate cut this year, with underlying inflation projected to remain above 3% in the near term before easing to around 2.6% by 2027. The ASX 30-Day Interbank Cash Rate Futures for February 2026 imply a 22% probability of a rate hike to 3.85% at the next RBA Board meeting.
AUD/USD Technical Analysis
The AUD/USD pair is trading around 0.6710, consolidating near the nine-day Exponential Moving Average (EMA). The 14-day Relative Strength Index (RSI) is above the midpoint, reinforcing underlying upside momentum. The pair remains above the nine-day EMA of 0.6700, supporting a bullish bias and targeting 0.6766, its highest level since October 2024. A daily close below the short-term average may bring the 50-day EMA into focus as initial support.
Australian Dollar's Performance Against Major Currencies
The table below shows the percentage change of the Australian Dollar (AUD) against listed major currencies. The AUD was the weakest against the New Zealand Dollar.
| Currency | Percentage Change |
| --- | --- |
| USD | 0.04% |
| EUR | -0.04% |
| GBP | -0.06% |
| JPY | 0.09% |
| CAD | -0.04% |
| AUD | -0.09% |
| NZD | 0.18% |
| CHF | -0.01% |
Interest Rates and Their Impact
Interest rates play a crucial role in the economy, influencing lending, borrowing, and investment decisions. They are set by central banks in response to economic changes, with a primary goal of ensuring price stability, often targeting a core inflation rate of around 2%. If inflation falls below the target, central banks may cut base lending rates to stimulate the economy. Conversely, if inflation rises above 2%, central banks typically raise base lending rates to curb inflation.
Higher interest rates can strengthen a country's currency by making it an attractive investment destination for global investors. However, they can also weigh on the price of gold, as higher rates increase the opportunity cost of holding gold instead of investing in interest-bearing assets or placing cash in the bank. The US Dollar's price is often influenced by interest rate expectations, and the Fed funds rate, set by the Federal Reserve, is a key indicator in this regard.
