AUD/USD Upbeat as the RBA Raised Rates Again & Expects More Moves Ahead

Another Rate Hike

The Reserve Bank of Australia (RBA) raised rates on Tuesday by 25 basis points as expected ^[1], marking the fourth straight hike of this size, after a series of larger moves. This was the ninth consecutive increase, since the May 2022 lift-off, which brought the cash rate to 3.35% and the highest since 2012.

Policymakers reiterated that returning inflation to the 2-3% target remains their priority and probably had little option for anything less after the recent surge in inflationary pressures, as headline CPI rose to 7.8% y/y in the fourth quarter and the highest level since 1990.

More Tightening Ahead

The labor market remains "very tight" and the unemployment rate hovers around the lowest in nearly fifty years, despite the slight uptick to 3.5% in December. Furthermore, officials continue to worry over wage inflation, expecting a "further pick-up".

Given the above, the board maintained guidance for "further increases" in interest rates over the coming months and removed the "…but it is not on a pre-set course" reference of the previous statement, in a hawkish twist.

On the other hand, the bank reaffirmed its expectation for a slowdown in economic activity, as GDP is seen at around 1.5% this year and the next, following a strong 2022. The board noted that the path to a soft landing remains "a narrow one".

Upbeat AUD/USD

The pair slumped last Friday after the surprisingly strong US jobs report, which has led to a hawkish market repricing around the Fed's terminal rate. This led to the worst week since September and the new one started on the back foot, but rises today, supported the RBA's commitment to further tightening.

AUD/USD tries to return above the EMA200 and maintain tits bullish bias. This keeps the June highs (0.7283) in the spotlight, but we are cautious at this stage about its ability to take them out.

The recent decline creates risk for a correction towards 0.6780-50, but a strong catalyst would be required for closes below this strong confluence of support, that could open the door to further losses towards and beyond 0.6628.

Markets now turn to Fed Chair Powell, who speaks at the Economic Club of Washington later today, for more insights on the Fed's intention that could determine the pair's trajectory.