The Australian Dollar (AUD) pauses its three-day winning streak against the US Dollar (USD) as traders await the Reserve Bank of Australia's (RBA) policy decision on Tuesday. The central bank is widely expected to lower its Official Cash Rate (OCR) by 25 basis points (bps) to 4.10%, marking the first rate cut in four years. However, policymakers may adopt a cautious stance, as trimmed mean inflation remains above the RBA's 2%-3% target range.

Signs of easing inflation in Australia have increased expectations for a rate cut in February. December data indicated slowing price pressures, with the latest quarterly Consumer Price Index (CPI) rising less than forecast in the final quarter of 2024. The RBA's preferred inflation measure, the Trimmed Mean CPI, climbed 0.5% for the quarter—below the expected 0.6%—while the annualized rate declined to 3.2% from 3.5%.

The Australian Dollar weakens as traders adopt caution ahead of the RBA's policy decision on Tuesday.
The RBA is expected to lower its Official Cash Rate by 25 basis points to 4.10%.
The US Dollar gains ground due to improved Treasury yields.

The AUD/USD pair found support following US President Donald Trump's decision to delay the implementation of reciprocal tariffs. Additionally, the US Dollar (USD) weakened as a disappointing US retail sales report fueled speculation that the Federal Reserve (Fed) might cut interest rates later this year, despite lingering inflation concerns.
Australian Dollar declines as US Dollar gains ground on improved Treasury yields

The US Dollar Index (DXY), which tracks the US Dollar's performance against six major currencies, edges higher after registering losses in the previous three successive sessions due to improved US Treasury yields. The DXY trades around 106.80, while yields on 2-year and 10-year US Treasury bonds stand at 4.26% and 4.50%, respectively.
Federal Reserve Governor Michelle Bowman stated on Monday that rising asset prices may have slowed the Fed's recent progress on inflation. While Bowman expects inflation to decline, she cautioned that upside risks remain and emphasized the need for more certainty before considering rate cuts.
Meanwhile, Fed Governor Christopher Waller acknowledged late Monday that while inflation has improved, progress has been "excruciatingly" slow. Waller stressed that the Fed must not allow policy uncertainty to hinder data-driven decision-making.
US Census Bureau reported on Friday that Retail Sales fell by 0.9% in January, following a revised 0.7% increase in December (previously reported as 0.4%). This decline was sharper than the market's expectation of a 0.1% drop.
Fed Chair Jerome Powell said in his semi-annual report to Congress that the board officials "do not need to be in a hurry" to cut interest rates due to strength in the job market and solid economic growth. He added that US President Donald Trump's tariff policies could put more upward pressure on prices, making it harder for the central bank to lower rates.
On Monday, Chinese President Xi Jinping led a meeting with Alibaba co-founder Jack Ma and other prominent entrepreneurs, signaling Beijing's renewed support for the private sector, which is now seen as crucial to economic recovery, according to Bloomberg. Xi emphasized the need to eliminate barriers that hinder equal access to production resources and fair market competition.

Source: Fxstreet