AUD/USD Jumps after RBA’s Rate Hold & Hawkish Tilt

RBA on a Less Dovish Path

The Reserve Bank of Australia is behind its major counterparts in the monetary tightening path and has repeatedly pushed back against rates hikes, whereas other central banks have already raised them multiple times.

The Federal Reserve raised interest rates in March for the first time since 2018, pointed to more hikes ahead and plans to begin reducing its balance sheet soon.

Despite being behind its major peers, the RBA has been turning less dovish lately, having concluded its asset purchases program in February. Moreover, governor Lowe recently departed from prior rhetoric against rate increases, saying in March that "it is plausible that the cash rate will be increased later this year". ^[1]

Rate Hold & Hawkish Tilt

Today, the central bank did not move on rates as was largely expected, maintaining the cash rate at 0.1% ^[2]. However, it made hawkish tweaks the policy statement, compared to prior ones.

Most importantly, it dropped the "patient" pledge, now saying that "The Board will assess this and other incoming information as its sets policy to support full employment in Australia and inflation outcomes consistent with the target".

In another dovish shift, albeit subtle, the statement now said that "The Board has wanted to see actual evidence that inflation is sustainably within the 2 to 3 per cent target range before it increases interest rates". In the March decision, the relevant section stated that the Board "will not increase" rates until inflation is sustainably within the target range. ^[3]

The RBA expects higher prices for petrol and other commodities to push inflation higher over the coming quarters and acknowledged a strong labor market, projecting Unemployment below 4% this year.

AUD/USD Analysis

This hawkish shift raises market expectations for rate hikes within the year, while it is also worth noting that Australia is holding Federal Election in May, with no exact date yet.

The pair rallies around 1% after the decision and surpasses 0.7600, levels not seen in nearly a year. It now tests 38.2% of the 2020 Low/2021 High advance (0.7635) and eyes 0.7677, atlhough the June 2021 high (0.7776) seems a bit distant.

Despite the buoyant mood, the move is technically overextended, while prospect of more Western sanctions against Russia may dampen sentiment and contain the Aussie. As such, downward pressure would not be surprising, but a strong reversal in sentiment would be needed for a return below the EMA100 (0.7520), which would pause the upside momentum.