Forex Market: AUD/USD rebounds from a 13-week low as RBA hikes rates for the first time since November 2010

AUD/USD rebounded from a 13-week trough on Tuesday after the Reserve Bank of Australia lifted the cash rate by 25 basis points to 0.35% at its policy meeting earlier today and also flagged further tightening to come as it seeks to curb inflation.

The hike move, which exceeded a consensus of analyst estimates, has been the first since November 2010.

The RBA noted the Australian economy had proven to be resilient as inflation had accelerated more quickly and that there was also evidence wages growth was speeding up.

Consumer price inflation in Australia rose to a 20-year high of 5.1% in Q1, driven by petrol, housing, food and education costs.

Core CPI inflation accelerated to 3.7% during the quarter, while moving outside of the central bank’s target range for the first time since 2010.

The RBA expects headline inflation to be around 6% and underlying inflation to be around 4.75% before easing to around 3% by mid-2024.

“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” RBA Governor Philip Lowe said in a statement.

“This will require a further lift in interest rates over the period ahead.”

Markets have already priced in an interest rate increase to 0.75% in June and a series of hikes to around 2.50% by the end of 2022.

Meanwhile, the RBA projects a 4.25% GDP growth in 2022 and a 2% growth in 2023.

As of 8:30 GMT on Tuesday AUD/USD was gaining 0.82% to trade at 0.7105. Yesterday the major Forex pair slipped as low as 0.7030, which has been its weakest level since January 31st (0.6987).

Bond Yield Spread

The spread between 2-year Australian and 2-year US bond yields, which reflects the flow of funds in a short term, equaled 0.4 basis points (0.004%) as of 8:15 GMT on Tuesday, up from -13.1 basis points on May 2nd.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7053
R1 – 0.7076
R2 – 0.7105
R3 – 0.7129
R4 – 0.7152

S1 – 0.7024
S2 – 0.7001
S3 – 0.6972
S4 – 0.6943