The AUD/USD pair moved higher in Asia on Thursday (08/05), trading around 0.6440 after falling more than 1% in the previous session. The pair had previously touched a five-month high of 0.6514 on Wednesday, but fell amid the prospect of cautious Federal Reserve (Fed) policy. As expected, the Fed kept interest rates unchanged at 4.25%–4.50%, but its statement acknowledged rising risks related to inflation and unemployment, which added new uncertainty to the market.

Market sentiment was further hit after Fed Chairman Jerome Powell's press conference, where he noted that US trade tariffs could hinder the Fed's goals for inflation and employment by 2025. Powell indicated that persistent policy instability could force the Fed to take a more patient, ‘wait and see' stance on future rate adjustments. While tariffs under the previous Trump administration have dented consumer and business confidence, the absence of particularly weak economic data has made it increasingly difficult for the Fed to justify any near-term policy changes.

The Fed statement reinforced its data-driven approach, calling inflation "moderately elevated" and pointing to rising risks on the inflation and employment fronts. This cautious outlook, coupled with the Fed's continued balance sheet reduction, has strengthened the US Dollar (USD), weighing on the AUD/USD pair.

Additional pressure on the AUD/USD pair came from US Dollar (USD) strength amid news that US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer will meet with Chinese Vice Premier He Lifeng in Geneva later this week—the first high-level US-China talks since the tariff-fueled trade dispute escalated.

Despite the decline, the Australian Dollar (AUD) remained supported by optimism over a possible breakthrough in US-China trade relations, given Australia's significant trade ties with China. Further boosting sentiment was the People's Bank of China's announcement of plans to lower its key lending rate and reduce banks' reserve requirements in a bid to spur economic growth.

The Ai Group Industrial Index improved in April, marking a 33rd straight month of contraction. Manufacturing, particularly in the export-dependent sector, has strengthened market expectations that the Reserve Bank of Australia (RBA) could cut the cash rate by 25 basis points to 3.85% later this month. (Newsmaker23)

Source: FXstreet