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Analysts at ING expect the Australian Dollar will struggle through the middle part of the year.
This is according to a new assessment of the currency's prospects ahead of an expected interest rate cut at the Reserve Bank of Australia (RBA) and further U.S. tariffs.
"We don’t see much of a reprieve for AUD/USD," says Francesco Pesole, FX Strategist at ING Bank, who thinks the Aussie currency is "a sell into the summer."
Analysis from ING finds that Australian Dollar performance is still largely a function of U.S. tariff concerns.
"While the dovish repricing in the AUD curve has undoubtedly been a contributor, the AUD/USD decline has largely followed growing risk of US protectionism," explains Pesole.
His analysis finds the RBA-Fed interest rate differential has not declined too aggressively since the U.S. election, which implies weakness is likely a result of tariff fears.
"We don’t see much of a reprieve for AUD/USD; we continue to see US President Donald Trump stepping up the tariff threat, and the RBA should keep its options open to cut rates on the back of economic risks. As we don’t think the peak of US protectionism impact on the market has been reached, we retain a bearish bias on AUD/USD to 0.60 into this summer," says Pesole.
Australia won a reprieve earlier in the week when President Anthony Albanese was able to carve out an exemption for Australia from import tariffs for aluminium and steel.
However, analysts have always believed the bigger risk to AUD stems from the global slowdown in trade and growth that the tariffs would pose.
Here, risks are still likely to persist and blow as a headwind to AUD.
The Australian Dollar, meanwhile, traded softer against the Pound and Euro amidst hopes an end to the Ukraine war is coming into view.
Above: GBP/AUD (top) and AUD/USD.
Donald Trump has spoken to Vladimir Putin and agreed to proceed with negotiations towards a cessation in the conflict.
Those currencies most exposed to Ukraine war risks are naturally benefiting.
The GBP/AUD exchange rate extends a weekly recovery to 1.9914 and we are now eyeing a potential test of 2.00 again. The EUR/AUD exchange rate is up a further 0.5% on the day at 1.6615.
Gains also come ahead of a potential interest rate cut at the RBA next week. Most analysts say any cut would come with 'hawkish' guidance that suggests further follow-through cuts are not guaranteed, which limits the AUD's downside.
However, there is ample scope for markets to 'price in' further rate cuts over the duration of the year, particularly if the RBA thinks a global trade war will negatively impact the domestic economy.
"Our baseline expectation is that the U.S. will increase duties on its global partners this year, with China remaining a main target. This clouds the Australian outlook, and we expect a reaction from the RBA in terms of monetary easing," says Deepali Bhargava, Regional Head of Research, Asia-Pacific at ING.
ING acknowledges the risk of inflationary bumps slowing its easing plans and currently forecasts 100bp of RBA easing in 2025.
This would be more than the market currently expects, implying downside risks to the Australian Dollar should an adjustment occur.