The Australian Dollar (AUD) got back on track on Thursday, as the US Dollar (USD) fell sharply. This made AUD/USD cross the 0.6500 mark again and continue its slow but steady rise.

Policy difference is the main topic of discussion

Currency markets remained connected to central bank messages as traders kept thinking about how interest rates may change.

The Federal Reserve (Fed) in the US kept rates the same in May, which was what most people expected. Chair Jerome Powell said again that the Fed’s decisions will be based on evidence. After that, lower inflation data (from both the Consumer Price Index and the Producer Price Index) and signals that the economy is slowing down have made markets more likely to expect a rate decrease by September, followed by a similar move in October.

The Reserve Bank of Australia (RBA) dropped its cash rate by 25 basis points, as was predicted, bringing it down to 3.85%. The central bank said that interest rates will gradually go down, with a target of 3.20% by 2027, inflation slowing to 2.6%, and GDP growth slowing to 2.1% in 2025. However, it also said that if consumer demand and wages fall, it might make even bigger cuts. On the other hand, officials said they may stop easing if things go worse across the world.

Australia’s future is uncertain since China is weak

Even if the trade winds seem to have calmed down since the US-China deal, feelings are still mixed since China’s recovery from the epidemic has been unequal.

Even if industrial production was better than expected in the first quarter, slow consumer spending and poor fixed-asset investment showed that there were still fundamental problems.

The People’s Bank of China (PboC) also slashed rates in May, lowering the 1-year and 5-year Loan Prime Rates (LPR) to 3.00% and 3.50%, respectively.

Last month, the Caixin Manufacturing PMI went even deeper into contraction zone, and consumer prices declined 0.1% over the last year. This shows that deflationary forces are still strong in the world’s second-largest economy.

Traders are being careful with the Aussie

The more cautious tone is seen in speculative posture. CFTC statistics through June 3 show that net short bets on the Aussie climbed to about 63.2K contracts. This is the most negative exposure in a few weeks.

The Euro (EUR) extended its weekly advance on Thursday, rising to fresh multi-year highs against a broadly weaker US Dollar (USD).

Indeed, EUR/USD rose to the 1.1630 zone for the first time since October 2021, while the US Dollar Index (DXY) slipped further below the key 98.00 threshold, dragged down by falling yields across different time frames and the absence of concrete progress on the trade front.

Trade détente lifts risk appetite

Markets continued to digest the renewed dialogue between the US and China. In fact, officials from both sides have been meeting in London since Monday, working toward a potential trade truce. US President Donald Trump described the agreement as “done” on Wednesday, noting that Beijing had committed to supplying magnets and rare earth materials under the new framework.

The White House confirmed the deal allows Washington to impose a 55% cumulative tariff on Chinese goods, divided into a 10% “reciprocal” levy, a 20% tax targeting fentanyl trafficking, and a 25% duty addressing existing trade barriers. In response, Beijing would apply a 10% tax on US imports.

Monetary divergence in focus

Beyond trade developments, diverging central bank policy paths continued to drive FX sentiment.

In May, the Federal Reserve (Fed) held rates steady, maintaining a data-driven posture amid disinflationary trends and softening US indicators. Market participants now see a growing chance of a rate cut by September followed by increasing chances of an extra cut in October.

In contrast, the European Central Bank (ECB) cut its deposit rate by 25 basis points last Thursday, taking the Deposit Facility Rate to 2.00%. However, the message came in on an unexpected hawkish tone.

Indeed, President Christine Lagarde ruled out further immediate easing, suggesting only a significant deterioration in trade conditions would prompt a reassessment. Upgraded growth projections added to the ECB’s cautious confidence.

Speculators lean into euro strength

CFTC data through June 3 revealed a rise in net long positions on the single currency to around 82.8K contracts, the highest in three weeks. Open interest, meanwhile, climbed above 781K contracts, the strongest level since 2021. Furthermore, commercial hedgers ramped up their short exposure to nearly 138.3K contracts, pointing to institutional demand for downside protection.