AUD/USD: Key Factors Shaping the Currency Outlook 2025
Excerpt from the 2025 AUD/USD Outlook Report
The RBA, Fed, and the Shifting Rate Differentials
The Federal Reserve’s easing cycle has reduced the RBA-Fed interest rate differential to just -15bps, a trend we anticipated in our 2024 outlook. Typically, this would be a bullish signal for AUD/USD, but recent developments have shifted the dynamics significantly.
Renewed Expectations for RBA Rate Cuts
Weak Q3 growth data from Australia has revived expectations for RBA rate cuts in 2025. The futures market has priced in three 25bp cuts—one each in April, June, and November—bringing the cash rate down from 4.35% to 3.6%. January’s data, particularly the quarterly CPI figures in late January and upcoming employment reports will likely determine whether the first cut will be brought forward to Q1.
Fewer Fed Rate Cuts Expected
The Federal Reserve has been easing in 2024 but signaled a significantly slower pace of cuts in 2025. They’ve revised their growth and inflation outlook upward to justify the slower pace. Despite this, the interest rate differential between the Fed and the RBA has narrowed to just -10bps, down from -60bps. This tightening differential partly explains the AUD/USD’s drop to a 2-year low following the Fed’s December meeting.
Trump, Tariffs, and China
While interest rate differentials are a key factor, we must also consider the geopolitical risks, including the potential for Trump’s tariffs and their impact on China, which could indirectly affect the Australian economy. Although the previous Trump administration did not impose tariffs on Australian exports, tensions with China and tariffs on other countries could still hurt Australia’s trade. The recent trend of a weaker yuan—due to tariffs—has shown a strong correlation with a weaker Australian dollar. With a robust US economy and a strong dollar, the outlook for AUD/USD in the short term appears challenging for bulls.
Political Pressures and the Australian Dollar
A weaker currency can be inflationary due to rising import costs, which may eventually push the RBA to become less dovish to support the currency. While we haven’t reached that point yet, the pressure will grow as the Australian dollar continues to weaken.
In Australian politics, Prime Minister Anthony Albanese’s term ends in 2025, with the next election expected by May 17th, although it could come earlier. Both major parties are pushing for lower interest rates, which could delay the election in hopes the RBA will have already implemented cuts.
Treasurer Jim Chalmers has been instrumental in ensuring that cuts come sooner, with the appointment of what are perceived to be dovish RBA board members. If the Australian dollar continues its downtrend, it could become a significant political issue, adding pressure on the RBA to act.
It’s also possible that, later in the year, Trump may advocate for a weaker US dollar if its current strength persists.
This excerpt is from our full 2025 AUD/USD Outlook report, part of a comprehensive series of nine reports on what to expect in the coming year.
