The Australian dollar has posted strong gains on Tuesday. In the European session, AUD/USD is trading at 0.6934, up 0.75%.
RBA expected to raise rates
There were no surprises from the RBA, which raised rates by 25 basis points, for a record ninth straight hike. This brings the cash rate to 3.35%, its highest level since 2012. The RBA has settled into a tightening policy of small but steady increments and has raised rates by 25 bp four consecutive times. RBA Governor Lowe’s rate statement after today’s meeting was more hawkish than expected, surprising the markets and giving a big boost to the Australian dollar.
Lowe said that “further increases in interest rates will be needed over the months ahead”, a signal that he was prepared to tighten by 50 bp and perhaps even more in order to tame inflation. Lowe added that this period of high inflation was only temporary, but with inflation hitting 7.8% in Q4, its highest since 1990, I wonder just how many investors would agree that high inflation is temporary.
The RBA’s steep rate-hike cycle is yet to tame inflation but it is taking a bite out of economic activity. Earlier in the week, retail sales slumped by 3.9% and January’s Manufacturing and Services PMIs both indicated contraction. Fortunately for the RBA, the employment market remains robust, allowing the central bank to continue raising rates.
The US dollar received a much-needed boost from the US employment report on Friday, and a host of Fed speakers this week could extend the dollar’s rally. The Fed members are expected to reiterate the “higher for longer” stance that the Fed has been pushing, and the markets will be listening closely as Fed Chair Powell delivers remarks in Washington later today.
- 0.6962 is a weak resistance line, followed by 0.7080
- 0.6841 and 0.6761 are providing support
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