The Reserve Bank of Australia Hiked Rates for the 3rd Time in a Row

RBA Hikes Rates

The Reserve Bank of Australia raised rates by 50 basis points, as widely expected, to 1.35% ^[1]. Rates are now at the highest level since May 2019, while today's move was the third hike in a row, which marked the longest streak in twelve years.

Unlike the June decision, today's move offered no surprises and the rhetoric was little changed. Officials expect more rate adjustments ahead, reiterating that "The Board expects to take further steps in the process of normalizing monetary conditions in Australia over the months ahead", while repeating their commitment to "doing what is necessary to ensure that inflation in Australia returns to target over time".

Similar to other major banks around the world, high Inflation is the main driver for the RBA's recent aggressive tightening cycle. The Consumer Price Index (CPI) hit 5.1% in the first quarter (year-over-year) and officials expect it to peak later this year, before dropping back towards the 2-3% target in 2023.

Despite the pandemic shock, the war in Ukraine and the tightening monetary environment, the Australian economy has shown noteworthy resilience. GDP grew by a healthy 3.3% in Q1 year over year and Unemployment steadied at 3.9% in May, the lowest in nearly 50 years.

This gives the RBA a high degree of freedom in pushing on the tightening front, a luxury that some other central banks don's seem to have, such as the Bank of England which is in a tough spot due to higher inflation and economic contraction expectations.

AUD/USD Analysis

Since today's RBA decision lacked any surprises, the pair is little changed and trades with caution, in what looks like a no man's land at the moment, with the Relative Strength Index hovering around the 50 mark.

Although definitely not dovish, the rhetoric lacked any overly hawkish elements that could change the downward momentum. AUD/USD comes from a negative June and the third quarter got underway with two-year lows (0.6762). Risk of fresh lows is high, although a larger decline towards and below 0.6647 may prove harder.

On the other hand, the pair managed to bounce after Friday's slump and further recovery towards the EMA200 (0.7000) would not be surprising, but breaking above it would require a sustained improvement in market sentiment. Furthermore, the upside looks unhospitable, since the descending trendline from the 2022 highs and the 200Day EMA loom.

We will now wait to see in what mood will US traders return from their long weekend, whereas form the economic calendar we mostly expect today's US Factory orders and Wednesday's PMI's and FOMC minutes.