AUD calm ahead of RBA decision

The Australian dollar has posted slight gains at the start of the week, as AUD/USD trades just above the 0.75 level.

Looking back at March, it was an excellent month for the Australian dollar. The currency rose 3.02%, its best month since October 2021. March was marred by the Russia-Ukraine war, which has led to turbulence in the financial markets and for the most part dampened risk appetite. Still, the risk-sensitive Aussie has thrived, thanks to high commodity prices. With Australia’s commodities in high demand, the Australian dollar has rebounded and is back above 0.7500, a psychologically significant level.

Investors are keeping a keen eye on the RBA policy meeting on Tuesday. The RBA is expected to maintain rates at an ultra-low 10%, but the key question is will policy makers make a hawkish pivot and follow in the footsteps of the Federal Reserve and BoE.  The Bank is under pressure to start tightening policy as inflation continues to move higher. The strong recovery has fuelled higher inflation, and last week’s government budget, which included plenty of pre-election goodies, is also likely to add to inflation. However, with an election expected to be called for May, the RBA would much prefer to stay on the sidelines and remain out of the spotlight during a period of political uncertainty.

Were it not for the election, the RBA would likely hit the rate trigger at the April or May meetings. Inflation has risen above the midpoint of the target band of 2-3% for the first time since 2014, and the labour market is close to full employment. Consumer spending is robust and commodity prices continue to rise. Governor Lowe will likely wait out the election before making any moves, and the markets have priced in a rate hike in June.

Lowe has remained dovish in his stance, despite the strong economic landscape, insisting that wage growth must rise before he will hike rates. It will be interesting to see if Lowe sounds more hawkish at tomorrow’s meeting; if yes, the Australian dollar would likely continue to propel higher.

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AUD/USD Technical

• 0.7458 is the first line of support. Below, there is support at 0.7416
• There is resistance at 0.7541 and 0.7582

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