AUD/USD has put the brakes on a 3-day slide today and has posted sharp gains. In the European session, the Australian dollar is trading at 0.6449, up 0.81%.
RBA delivers modest 0.25% hike
As was widely expected, the Reserve Bank of Australia raised rates today by just 25 basis points to 2.85%. This move follows the 25 bp increase in September, which was lower than the markets expected. The cash rate is now at its highest level since April 2013, but the RBA is easing its foot off the rate pedal, despite inflation remaining stubbornly high. Investors appeared pleased with the move, as the Australian dollar has climbed sharply.
Inflation jumped to 7.3% in the third quarter, up sharply from 6.1% in Q2, as inflation has not shown any indication of peaking, despite the aggressive tightening cycle that the RBA started in May. The inflation data had some market observers predicting a 50 bp hike, as the RBA has made inflation its top priority, but in the end, policymakers opted for the smaller increase. The RBA may be concerned that rate increases take time to trickle throughout the economy and further oversize hikes could be extremely detrimental to economic growth.
The central bank has projected that inflation will peak at 7.5%, but if it is wrong and inflation hits 8% or higher, the RBA will have to backtrack and resort to rate hikes of 40 bp or higher in order to curb inflation. The RBA would like to continue with 25 bp hikes in the coming months, but that is contingent on inflation cooperating, which currently seems to be a very big “if”. The terminal rate is expected in the range of 3.35-3.6%, which means that the current rate-tightening cycle is expected to continue until early 2023.
- AUD/USD is testing resistance at 0.6403. Above, there is resistance at 0.6532
- There is support at 0.6283 and 0.6196