RBA taper sends Aussie higher

The Australian dollar is up sharply on Tuesday. In the European session, AUD/USD is trading at 0.7581, up 0.68% on the day.

RBA scales back QE, Aussie jumps

As expected, the Reserve Bank of Australia (RBA) maintained its monetary policy, including holding interest rates at a record low 0.10% for an eighth straight month. The RBA also decided that the timing was right for a trim to its QE programme, which ends in September. The central bank announced that it would reduce QE purchases from AUD 5 billion per week to 4 billion per week, with this move to be reassessed in November.

Predictably, the markets gave a thumbs-up on the news of a QE taper and the Australian dollar jumped on the news – the currency has risen an impressive 1.0% so far in July. However, some caution is warranted before jumping on the Aussie bandwagon in expectations that the upswing will continue. At today’s policy meeting, the RBA’s forward guidance remained dovish. Policymakers said that the conditions needed to raise rates, including inflation at 2-3% and wage growth of 3% was unlikely to be met prior to 2024.

RBA Governor Lowe acknowledged that economic data had been better than expected, and this was likely the reason that he gave the green light for a taper, even with a resurgence in Covid which has led to lockdowns in much of the country. Lowe was clear in his commitment to monetary stimulus to support the economy, even with the taper, saying that “the board remains committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation consistent with the target”.

The RBA’s message to the markets is that the economy’s performance warrants a slight tightening in policy, but stimulus is still required until inflation and employment targets have been met.

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AUD/USD Technical

• AUD/USD put strong pressure on 0.7604 in the Asian session before retreating. The next resistance line is 0.7681
• On the downside, 0.7447 has some breathing room in support, with AUD/USD rising sharply. Below, there is support at 0.7367

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-event

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