AUD/USD edges higher as soft US PMI data and expectations for RBA policy provide support

AUD/USD Holds Steady Near 0.6700 After US PMI Data

The AUD/USD pair hovered close to 0.6700 on Monday, gaining 0.10% for the session. This rebound came after the currency erased earlier losses in response to the latest US Purchasing Managers Index (PMI) figures. The Australian Dollar (AUD) continues to demonstrate strength, even as global economic uncertainty persists.

Chinese Economic Indicators Impact Australian Dollar

Recent data from China has played a significant role in shaping sentiment toward the AUD. In December, China’s RatingDog Services PMI dipped slightly to 52.0 from 52.1 in November, indicating a modest slowdown in the services sector. Meanwhile, last week’s report from RatingDog revealed that the Manufacturing PMI inched up to 50.1 from 49.9, signaling a return to expansion. Since China is Australia’s largest trading partner, shifts in the Chinese economy remain highly influential for the Australian Dollar.

Domestic Factors: Inflation and RBA Policy Outlook

Within Australia, expectations for further monetary tightening are lending support to the Aussie. Investors are now focused on the upcoming release of Australia’s fourth-quarter Consumer Price Index (CPI), scheduled for January 28. Many analysts suggest that if core inflation comes in higher than anticipated, the Reserve Bank of Australia (RBA) may consider raising interest rates at its February 3 meeting. RBA Governor Michele Bullock recently commented that, although an immediate rate hike was not directly discussed, the board did review scenarios that could require tighter monetary policy.

US Dollar Reacts to Geopolitical Events and Economic Data

Earlier in the day, the US Dollar (USD) found support as investors sought safe-haven assets amid rising geopolitical tensions in Latin America. The Greenback strengthened following news that the United States had detained Venezuelan President Nicolas Maduro, reigniting concerns and boosting demand for the USD.

However, the USD’s momentum faded after the US Institute for Supply Management (ISM) released its Manufacturing PMI, which dropped for the third month in a row to 47.9 in December—down from 48.2 in November and missing forecasts of 48.3. This decline points to a sharper contraction in US manufacturing, largely due to weaker production and inventory levels, while inflationary pressures persist. Although some subcomponents, such as New Orders and Export Orders, showed slight gains, the overall report underscores a cooling industrial sector and adds complexity to the economic outlook and monetary policy expectations in the US.

Market Expectations for Fed Policy

Looking ahead, markets are still factoring in two more Federal Reserve rate cuts in 2026. Investors are also watching for potential changes in Fed leadership, as President Donald Trump may nominate a new Chair when Jerome Powell’s term concludes in May—a move that could signal a shift toward a more accommodative policy stance. Meanwhile, minutes from the December Federal Open Market Committee (FOMC) meeting revealed that several members favored pausing additional rate cuts, provided inflation continues its gradual decline.