The Australian dollar is in positive territory on Tuesday, after sustaining losses of 1.4% a day earlier. In European trade, AUD/USD is trading at 0.6721, up 0.35%.
RBA raises cash rate by 25 bp
The Reserve Bank of Australia lifted interest rates by 25 basis points, bringing the cash rate to 3.1%. This is the highest the cash rate has been since 2012, and there was some speculation that the RBA might take a pause from raising rates. One can also make the argument that with the next rate meeting not until February 7th, there will anyway be a “default pause” in January. As the move was widely expected, the Australian dollar has had a muted reaction to the move.
There wasn’t much for investors to glean from Philip Lowe’s rate statement, which was almost identical to the November statement. Lowe noted that the RBA expects to increase rates, but “is not on a pre-set course” and rate decisions would be data-dependent. This last point may seem obvious, but events such as consumer spending, employment and inflation will be key drivers which determine rate policy in the early part of 2023. There is a great deal of uncertainty as to the terminal rate, which forecasts ranging from 3.3% all the way to 3.8%. What is clear is that the RBA is likely to resume its rate hikes in February, barring a remarkable decline in inflation.
The markets will have to quickly shift attention from the RBA to GDP, which will be released on Wednesday. GDP for Q3 is expected to slow to 0.7%, down from 0.9%. A reading that is wide of the mark could result in some volatility from AUD/USD.
- AUD/USD faces resistance at 0.6760 and 0.6878
- There is support at 0.6676 and 0.6558
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