What’s the AUD/USD Outlook After the RBA Raised Rates to a 12-Year High?

The RBA’s Board opted to hike the cash rate to 4.35%, an increase of 25 basis points, along with a similar adjustment to the rate on Exchange Settlement balances, setting it at 4.25%. This move mostly comes in response to unexpected and sustained inflation levels over the past few months and growing uncertainty.

Will the RBA increase its interest rates one more time this year? Will the AUD/USD experience another dip? What might be in store for the ASX 200?

The Risk of Prolonged High Inflation in Australia Has Increased According to the RBA

In her monetary policy statement, the RBA’s governor, Michele Bullock, declared that in Australia, inflation has exceeded prior expectations and remains at elevated levels, presenting an ongoing challenge.

The most recent data from the Australian Bureau of Statistics reveals a 5.4% increase in the Consumer Price Index (CPI) over the twelve months ending in the September 2023 quarter.

The CPI, which measures the average change over time in the prices paid by households for a basket of goods and services, is a critical gauge of inflation. High inflation, while some degree of it is natural, can be detrimental to an economy. It erodes the purchasing power of consumers, making everyday goods and services more expensive. This can reduce the standard of living for households and create uncertainty in financial planning.

Moreover, high inflation can negatively impact businesses by increasing their production costs, which can lead to reduced investment, job cuts, and overall economic instability. Central banks aim to maintain a balanced inflation rate, typically targeting a specific range. In Australia, the target range is 2 to 3%.

The elevated inflation levels indicated by the recent CPI data have raised significant concerns, leading the Reserve Bank of Australia to implement a series of interest rate hikes. Today’s decision follows a period of interest rate stability since June 2023, which came after a substantial 4 percentage point increase between May 2022 and June 2023.

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Despite the Rate Hike Ending Four Months of Steady Monetary Policy in Australia, the AUD/USD is Down

As you can see in the chart below, taken before the European opening on the TradingView trading platform with the financial data of the regulated broker ActivTrades, the currency pair AUD/USD is down 0.85% at 0.64347, as investors interpreted the central bank’s speech as suggesting a follow-up rate hike may not be necessary to curb inflation.

Daily AUD/USD Chart – Source: TradingView

The softer (dovish) guidance from the RBA has put a downward pressure on the Australian Dollar. Similar to the Federal Reserve in the United States or the European Central Bank in Europe, future rate hikes in Australia will hinge on the economic data published between now and the next meeting on December 5, 2023.

The dynamics of the currency pair today resembled a classic case of “buy on rumor, sell on fact.”

After hitting a bottom level at the end of last month, the AUD/USD pair demonstrated an impressive surge of over 3.20% between October 26th and November 5th, marking its highest level since August 2023. However, in the last three days, it experienced a reversal, shedding more than 1.20% in value.

The pair has entered the bearish Ichimoku cloud. Nevertheless, prices are still above the Japanese indicator’s other lines, and the RSI remains in positive territory, positioned above the neutral level of 50.

For the remainder of the week, traders will closely monitor any statements from Federal Reserve officials and their potential impact on the Treasury market. Particular attention will be given to the speeches by Jerome Powell scheduled for Wednesday and Thursday.

The S&P/ASX 200 Halts Its Five-Day Rally Following Hawkish RBA Worries

Following a five-day upward surge, during which it gained approximately 3.35%, the primary Australian index, S&P/ASX 200, is currently showing a minor decline today, with a decrease of -0.29% at the time of this writing.

For the index to sustain its upward momentum, move above the Ichimoku cloud, and potentially reach again its yearly highs, it is crucial for the currency pair to maintain positions above the Tenkan and Kijun lines of the Ichimoku indicator, while the RSI should keep rising above its neutral level of 50.

Daily S&P/ASX 200 Chart – Source: TradingView

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This article was originally posted on FX Empire

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