AUD/USD Rises after the RBA Hikes Rates for the First Time in More than 10 Years

RBA Raised Rates

The Reserve Bank of Australia (RBA) increased interest rates by 25 basis points today, bringing them to 0.35% ^[1], marking the first hike since November 2010. It decided that "now was the right time to begin withdrawing some of the extraordinary monetary support" and stressed its commitment to do "what is necessary" to bring inflation down.

The Board pointed to further tightening, saying that "This will require a further lift in interest rates over the period ahead" and noted that it will monitor incoming data to determine the "timing and extent of future interest rate increases".

The central bank had concluded its asset purchases program earlier in the year and today it announced that it does not plan to reinvest the proceeds of maturing government bonds, which would lead to a decline in its balance sheet.

Shifting Stance & High Inflation

The RBA is far behind than most of its major counterparts in the monetary policy tightening, but has been shifting towards a more hawkish direction this year. In February it had stopped buying government bonds, while in the in the previous meeting in April, it had dropped the "patient" pledge. ^[2]

Today's move comes ahead of the May 21 Australian Federal Elections and in a backdrop of surging inflation, with last week's data having brought forward market expectations around the rates liftoff.

Headline CPI Inflation jumped 5.1% year-over-year in the first quarter of 2022 (year-over-year), while the Trimmed Mean, which excludes large price rises and falls, rose to 3.7% year-over-year. The central bank recognized today that inflation "has picked up significantly and by more than expected" and projects higher headline inflation of around 6% this year.

The Board acknowledged uncertainties from the Covid-19 situation in China, the war in Ukraine and shrinking consumer purchasing power, but sounded upbeat on the Australian economy and the Labor market, forecasting GDP to grow by 4.25% over 2022 and the Unemployment Rate to decline to around 3.5% by early 2023.

AUD/USD Analysis

The pair reacted higher to today's decision, but caution is needed as the US Federal Reserve announces its monetary policy decision on Wednesday.

The US central bank had already moved on rates in March and has been preparing markets for a more aggressive 50 basis points hike in tomorrow meeting. Fed Chair Powell had recently alluded to that prospect, saying that "I would say 50 basis points will be on the table for the May meeting". ^[3]

AUD/USD now brings 0.7181 in its crosshairs, but fresh impetus will likely be required for a move beyond this level and towards mid-0.7200.

Despite today's hawkish move by the RBA, the pair comes from a very bad month and a five-month losing-streak. As long as it does not surpass the EMA100 (black line), immediate bias is on the downside and risk for fresh monthly lows (0.7029) does not go away, although it is probably early for a test of the yearly ones (0.6960).