Australian Dollar Jumps as RBA Hikes; How Much More to Go For AUD/USD?

AUD/USD, Australian Dollar, RBA – Talking Points:

• RBA surprisingly hiked the benchmark cash rate by 25 basis points.
• AUD jumped as the central bank left the door open for further tightening.
• What’s next for AUD/USD?

The Australian dollar jumped after the Reserve Bank of Australia (RBA) surprisingly hiked interest rates by 25 basis points and said some further tightening may be required in its determination to return inflation to its target.

The RBA was generally expected to keep its benchmark cash rate on hold at 3.85%, but last week’s minimum wage hike made it a close call. The market was pricing in roughly a 30% chance of a 25-basis-point rate hike at today’s meeting, with the benchmark rate to reach 4.18% by September. At the time of writing the odds show continued to show a terminal rate of 4.26%.

AUD/USD 5-minute Chart

Chart Created Using TradingView

The central bank said upside risks to the inflation outlook have increased and the board has responded accordingly. It maintained a hawkish bias saying a further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe.

The Australian central bank surprised markets by raising rates last month after pausing in April and maintained a hawkish tone in a bid to tame price pressures. Australia’s inflation has been running well above the target, and the minimum wage rise could further delay achieving the price target, thereby requiring higher interest rates.

Commodity Prices and US Recession Odds; Australia Inflation

Source data: Bloomberg; Chart prepared in Excel

Inflation is only projected to return to the top of the RBA’s 2-3% target range by mid-2025 – headline inflation rose 6.8% on-year in April and 7.0% in the first quarter, down moderately from a peak of 7.9%. Moreover, the jobs market has been tight with the unemployment rate hovering around five-decade lows, but signs of moderation in the labour market are emerging.

AUD/USD Daily Chart

Chart Created Using TradingView

AUD/USD jumped in reaction to the ‘hawkish hike’. In recent days, the Australian currency has received a boost after the US House of Representatives passed the debt ceiling bill and reports that China is working on new measures to support the property market.

On technical charts, AUD/USD has managed to recoup some losses, rising above an immediate hurdle at the March low of 0.6560. However,as highlighted on Monday, unless AUD/USD breaks above the crucial barrier at 0.6805, the path of least resistance remains sideways to down. On the upside, any break above 0.6805 could clear the path toward the February high of 0.7160.

— Written by Manish Jaradi, Strategist for DailyFX.com

— Contact and follow Jaradi on Twitter: @JaradiManish