Forex Market: AUD/USD extends rebound from 2-year trough as RBA hints at June rate hike

AUD/USD rose for a third straight trading day on Tuesday, rebounding from last week’s 2-year low, after the Reserve Bank of Australia dropped a heavy hint that it would hike rates again next month.

The minutes of the RBA’s May policy meeting, released on Tuesday, showed the central bank had considered a sharper rate hike this month.

The minutes also showed that Australia’s CPI inflation was “expected to increase further in the near term before falling back towards the top of the target range by mid-2024.”

RBA policy makers saw a risk of inflation pressure building even further if the central bank had waited any longer to increase the cash rate for the first time in more than 10 years.

Markets are now pricing in a 0.25% interest rate hike to 0.60% at RBA’s policy meeting on June 7th and a further increase to 1.35% by August.

“We expect upside risks to inflation to materialise in Q2 and forecast trimmed mean inflation to rise to 5.0%, much stronger than the RBA’s forecast of 4.5%,” Ben Udy, an economist at Capital Economics, was quoted as saying by Reuters.

“That will prompt the Bank to ramp up the pace of tightening, lifting rates by a larger 40bp in August. If we’re right then the cash rate should reach 2.25% by the end of this year.”

Market players will be paying attention to Australia’s first-quarter wage inflation data due out on Wednesday, with expectations pointing to annual growth of 2.5% and quarter-on-quarter growth of 0.8%.

“We think an upward surprise of 1% quarter/quarter growth in tomorrow’s wage price index could be enough to get the Reserve Bank of Australia over the line for (a) 40 basis point (hike),” ANZ Bank analysts wrote in an investor note.

As of 8:22 GMT on Tuesday AUD/USD was gaining 0.80% to trade at 0.7026. Last week the major Forex pair went down as low as 0.6829, which has been its weakest level since June 22nd 2020 (0.6807).

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 18.6 basis points (0.186%) as of 8:15 GMT on Tuesday, up from 17.3 basis points on May 16th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.6941
R1 – 0.7011
R2 – 0.7052
R3 – 0.7121
R4 – 0.7191

S1 – 0.6900
S2 – 0.6831
S3 – 0.6790
S4 – 0.6749