The Australian Dollar (AUD) strengthened against the US Dollar (USD) for a second consecutive day on Monday, supported by positive economic data from China and growing expectations of interest rate cuts by the U.S. Federal Reserve. The AUD/USD pair saw upward momentum after China reported better-than-expected economic growth for the third quarter.
Meanwhile, the US Dollar is facing significant pressure from a prolonged government shutdown and clear signals from Federal Reserve officials that monetary policy easing is likely. These converging factors have created a favorable environment for the Australian currency, though domestic economic concerns in Australia may limit its gains.
Key Takeaways
- China's Economy: China's third-quarter GDP grew 1.1% quarter-over-quarter, exceeding forecasts and providing support for the Australian Dollar.
- US Dollar Weakness: An ongoing U.S. government shutdown and strong indications of upcoming Federal Reserve rate cuts are weighing on the USD.
- RBA Outlook: The Reserve Bank of Australia (RBA) may consider a rate cut in November after a surprise increase in the national unemployment rate to 4.5%.
- Market Sentiment: The AUD/USD pair is trading around the 0.6510 level, navigating a complex mix of international and domestic economic signals.
China's Economic Strength Provides Key Support
The Australian Dollar's performance is closely tied to the economic health of China, its largest trading partner. On Monday, positive news from Beijing helped lift the currency. The People’s Bank of China (PBoC) announced its decision to maintain its key lending rates, holding the one-year Loan Prime Rate (LPR) at 3.00% and the five-year LPR at 3.50%.
This decision was followed by the release of encouraging economic growth figures. According to official data, China's Gross Domestic Product (GDP) expanded by 4.8% year-over-year in the third quarter of 2025, meeting expectations. More significantly, the economy grew by 1.1% on a quarter-over-quarter basis, surpassing the market consensus of 0.8%.
China's Q3 Economic Snapshot
- GDP Growth (YoY): 4.8%
- GDP Growth (QoQ): 1.1% (Exceeded 0.8% forecast)
- Retail Sales (Sept): +3.0% (Slightly above 2.9% forecast)
- Industrial Production (Sept): +6.5% (Well above 5.0% forecast)
Other data points also painted a robust picture. Retail sales for September increased by 3.0%, slightly ahead of the 2.9% expected. Industrial production was particularly strong, rising 6.5% compared to an estimated 5.0%. Since a strong Chinese economy typically increases demand for Australian raw materials, this data directly supports the value of the AUD.
US Dollar Weakens Amid Political and Economic Uncertainty
While the AUD found support from international trade dynamics, the US Dollar is contending with multiple domestic challenges. The U.S. Dollar Index (DXY), which measures the greenback against a basket of major currencies, traded lower around 98.50.
A primary factor is the ongoing U.S. government shutdown, which has now entered its 19th day, making it the third-longest funding lapse in modern U.S. history. The continued political impasse in Washington has created uncertainty and is beginning to weigh on economic sentiment.
Federal Reserve Signals Impending Rate Cuts
Compounding the dollar's weakness is a clear shift in tone from the Federal Reserve. Several officials have recently signaled their support for lowering interest rates to bolster the economy. On Friday, St. Louis Fed President Alberto Musalem stated he could support another rate cut if risks to employment emerge while inflation remains low.
"The Fed should not be on a preset course and follow a balanced approach," Musalem commented, emphasizing data-driven decision-making.
His sentiment was echoed by other Fed members. Governor Christopher Waller expressed support for a rate cut at the upcoming policy meeting, while the newest governor, Stephen Miran, advocated for a more aggressive easing cycle in 2025. Federal Reserve Chair Jerome Powell also noted that the central bank is on track for a quarter-point rate reduction this month, citing a low pace of hiring.
Market Expectations for Fed Action
Financial markets have fully priced in the Fed's dovish stance. According to the CME FedWatch Tool, traders see nearly a 100% probability of a rate cut in October and a 96% chance of an additional reduction in December. This widespread expectation of lower U.S. interest rates makes the dollar less attractive to foreign investors, causing its value to decline.
Domestic Factors Could Cap Australian Dollar's Rally
Despite the positive external environment, the Australian Dollar faces headwinds from its own domestic economy. The primary concern is the labor market, where a recent surprise uptick in the unemployment rate has increased the likelihood of a rate cut by the Reserve Bank of Australia (RBA).
In September, Australia's unemployment rate jumped to 4.5%, a near four-year high. This figure was higher than both market forecasts and the previous month's 4.3%, prompting speculation that the RBA will act to stimulate the economy at its November meeting.
RBA Officials Offer Cautious Outlook
Recent comments from RBA officials reflect a cautious approach. Assistant Governor Christopher Kent noted last week that financial conditions are already less restrictive following recent rate cuts and that the current cash rate is within a neutral range. He emphasized that the central bank is reassessing its outlook as new data becomes available.
Separately, Assistant Governor Sarah Hunter acknowledged that recent data has been slightly stronger than expected and that inflation might be higher than forecast in the third quarter. However, she also highlighted that "uncertainty about the global outlook remains elevated." This balanced view suggests the RBA is closely monitoring both domestic and international developments before committing to further policy changes.
Technical Outlook for AUD/USD
From a technical standpoint, the AUD/USD pair is trading around 0.6510. Analysis of the daily chart shows the pair remains within a descending channel, indicating a broader bearish trend. The 14-day Relative Strength Index (RSI) is still below the 50 mark, which reinforces this negative outlook.
The immediate resistance for the pair is the nine-day Exponential Moving Average (EMA) at 0.6517. A break above this level could open the way to the 50-day EMA at 0.6547 and the upper boundary of the descending channel near 0.6580.
On the downside, if the pair fails to hold its current levels, it could find support near the lower boundary of the channel around 0.6430. Further selling pressure could push it toward the four-month low of 0.6414, with a more significant support level at the five-month low of 0.6372.
