Aussie takes a breath after wild ride

The Australian dollar is drifting on Wednesday, after taking quite the ride a day earlier, courtesy of the RBA rate decision.

RBA hawkishness sends Aussie soaring

AUD/USD rocketed some 200 points at one stage on Tuesday, in response to the RBA rate statement at its policy meeting. The Bank held rates at an ultra-low 0.10%, where they have been pegged since November 2020. The rate statement was more important for what it didn’t say, as the word “patient” was conspicuously missing. Patience has been a key message from Governor Lowe, who has implored the markets to remain patient over rate hikes, even with rising inflation. Lowe had previously argued that he would not raise rates until wage growth hit 3%, which would indicate that inflation was sustainable. In yesterday’s statement, Lowe appeared to backtrack, noting that he expected wages to rise.

With Lowe changing his dovish tune and hinting at a rate hike soon, the markets pounced and sent AUD/USD soaring. The Aussie did cough up most of those gains, but the brief upswing showed how sensitive the currency is to any perceived hawkishness from the RBA.

Australia has a robust labor market, rising inflation and solid growth. These are all ingredients for a rate hike, but a move may have to be delayed due to a federal election in May. The RBA doesn’t want to make any major moves during an election campaign, leaving June as a likely date for the start of a rate-hike cycle. The markets have priced in an 84% chance of a 0.25% hike in June, and close to a 50% likelihood of a 0.50% hike, with up to seven more increases before the end of the year. With the economy performing well and the RBA on the cusp of a series of rate hikes, I expect the Aussie to resume its upswing in the short term.

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AUD/USD Technical

• 0.7582 is a weak resistance line. Above, there is resistance at 0.7682
• There is support at 0.7541 and 0.7458

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