The Australian dollar continues to lose ground and is sharply lower on Tuesday. In the European session, AUD/USD is trading at 0.6676, down 0.81%. Earlier, the Australian dollar fell as low as 0.6674, its lowest level since December 23rd.
RBA delivers a ‘dovish hike’
There were no surprises from the RBA, which hiked rates by 25 basis points and raised the cash rate to 3.6%. This marked a fifth consecutive increase of 25 bp, as the central bank continues to raise rates in modest increments in a bid to curb inflation without choking economic growth.
This rate decision was noteworthy in the language of the rate statement, which suggested that the RBA could be nearing the end of the current rate cycle. The statement removed a reference in the February statement to needing to raise rates “over the months ahead”, and instead stated that “tightening of monetary policy will be needed to ensure that inflation returns to target. The markets picked up on this change in language as a dovish signal. As well, the statement explicitly said that inflation had peaked, another hint that multiple rate hikes may not be needed. The dovish tone of the statement has sent the Australian dollar considerably lower today.
In the US, Federal Reserve Chair Powell testifies today on the semi-annual monetary policy report. The Fed has been consistently hawkish about the need to continue raising rates and the markets have aligned their expectations closer to the Fed. It was only a few weeks ago that the markets were projecting a pause followed by rate cuts, but this has changed to expectations for three more rate hikes this year.
There is a lot of uncertainty in the air about inflation and interest rates after a host of stronger-than-expected data in January, such as a blowout employment report. These strong numbers may have been a blip, and it will be interesting to see if Powell reiterates a hawkish stance and ignores the January numbers. The markets are widely expecting a 25-basis point hike at the March 22 meeting, but a 50 bp increase cannot be discounted, as the Fed has said that the pace of rate hikes could be ‘higher and longer’.
AUD/USD Technical
- AUD/USD is testing support at 0.6749. Below, there is support at 0.6660
- There is resistance at 0.6862 and 0.7025
