Forex Market: AUD/USD pressured near 2-year lows even as RBA hikes rates for third straight month, flags further tightening

AUD/USD remained pressured near the two-year low from last week even after the Reserve Bank of Australia raised interest rates for a third consecutive month at its policy meeting earlier on Tuesday and signaled further tightening ahead in an attempt to bring surging inflation back under control.

The RBA raised its cash rate by 50 basis points to 1.35%, while delivering 125 basis points of rate hikes in the past three months – the most considerable string of moves since 1994.

“The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead,” RBA Governor Philip Lowe said in a statement.

Still, some had expected a more aggressive move from the RBA, especially after the Federal Reserve’s 75 basis-point rate hike in June.

“We got a small wobble in the Aussie as the statement appears to confirm that if the RBA board did debate an option other than the 50 basis points we got, it was the 25 basis points that Governor Lowe flagged a couple of weeks ago, and not 75 basis points,” Westpac strategist Sean Callow said.

The RBA’s Board remained confident that the economy was strong enough to withstand higher interest rates, with the rate of unemployment (3.9%) being at its lowest level in nearly 50 years and job vacancies being at an all-time high.

Markets now expect RBA’s cash rate to be at 3.25% by the end of 2022, compared with 3.75% in early June.

“We now expect inflation to peak at 8% and expect the cash rate to rise to 3.5%,” Marcel Thieliant, senior economist at Capital Economics, said.

“But we suspect that lower house prices will result in a plunge in dwellings investment that will bring the economy close to recession next year,” he added.

As of 8:54 GMT on Tuesday AUD/USD was losing 0.97% to trade at 0.6793. Last Friday the major Forex pair went down as low as 0.6764, which has been its weakest level since June 1st 2020 (0.6648).

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 -13.7 basis points (-0.137%) as of 8:15 GMT on Tuesday, down from -9.8 basis points on July 4th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.6847
R1 – 0.6901
R2 – 0.6942
R3 – 0.6996
R4 – 0.7049

S1 – 0.6806
S2 – 0.6753
S3 – 0.6711
S4 – 0.6670