Forex Market: AUD/USD sharply off 1 1/2-month highs as RBA hikes rates again, but delivers less hawkish message

AUD/USD retreated sharply from recent 1 1/2-month peak on Tuesday, as market players trimmed bets on how far and how fast interest rates in Australia would ultimately rise.

The Reserve Bank of Australia (RBA) raised its cash rate by 50 basis points to 1.85% at its policy meeting earlier today, in line with expectations, while delivering 175 basis points of rate hikes in the past four months – the most considerable string of moves since early 1990s.

However, RBA Governor Philip Lowe made policy outlook more conditional.

“The Board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path,” he said in a statement.

Markets took that as a dovish move, especially after the RBA Governor has not once said the bank’s board aims at a neutral level of interest rates of at least 2.5% – a level that would, in theory, neither stimulate, nor hinder economic growth.

“The statement was on the dovish side of expectations, suggesting that the discussion at the September meeting may well move back to the 25bp or 50bp debate,” Adam Cole, a strategist at RBC Capital Markets, was quoted as saying by Reuters.

Markets are now pricing another 50 basis point rate hike in September, while interest rates are seen peaking at around 3.31%, compared with 3.41% prior to the central bank’s statement.

RBA’s Lowe now expects CPI inflation to peak at 7.75%, compared with a previous forecast of 7%. Consumer inflation will probably not return to the upper bound of the RBA’s 2%-3% target range until 2024.

Meanwhile, Australian GDP growth forecasts were revised down, as RBA now expects economy to grow 3.25% in 2022 (compared with 4.2% previously) and 1.75% in 2023 (compared with 2.0% previously).

As of 8:55 GMT on Tuesday AUD/USD was losing 1.43% to trade at 0.6920. Yesterday the major Forex pair went up as high as 0.7047, which has been its strongest level since June 17th (0.7051).

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 -30.0 basis points (-0.300%) as of 8:15 GMT on Tuesday, down from -27.0 basis points on August 1st.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7012
R1 – 0.7056
R2 – 0.7091
R3 – 0.7135
R4 – 0.7178

S1 – 0.6977
S2 – 0.6933
S3 – 0.6898
S4 – 0.6863