Forex Market: AUD/USD at 2 1/2-month low as RBA moderates hawkish outlook, dollar steady ahead of Powell testimony

AUD/USD registered a fresh 2 1/2-month low on Tuesday, after the Reserve Bank of Australia suggested it might be almost done with policy tightening as consumer spending was slowing and there was lower risk of a wages-driven inflation blow-out.

The RBA raised its cash rate by 25 basis points to 3.60% at its March policy meeting earlier on Tuesday, in line with market expectations.

The central bank has delivered a total tightening of 350 basis points since May 2022, while taking borrowing costs to their highest level since May 2012.

However, the RBA changed a reference to further rate “increases” by saying instead “further tightening” would be required. This was considered as a hint the central bank might be approaching the end of its cycle of rate hikes.

“An initial glance at RBA’s statement suggests they are nearing the end of the tightening cycle, and perhaps one step closer to publicly discussing a pause,” Matt Simpson, senior market analyst at City Index, was quoted as saying by Reuters.

The central bank expects CPI inflation to be at 4.75% this year and to slow to around 3% by mid-2025.

With regard to Australia’s GDP growth, the RBA expects economy to expand at rates below trend in the next couple of years due to slowing consumption and softening housing construction.

Meanwhile, the US Dollar was mostly steady ahead of Federal Reserve Chair Jerome Powell’s testimony before Congress on Tuesday and Wednesday.

According to Kevin Cummins, chief economist at NatWest Markets, The Fed Chair will likely express heightened concern over inflation, but he will probably stop short of raising expectations for a 50 basis point rate hike later this month.

As of 9:12 GMT on Tuesday AUD/USD was retreating 0.69% to trade at 0.6683. Earlier in the day, the major Forex pair went down as low as 0.6679, which has been its weakest level since December 23rd 2022 (0.6659).

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 -140.4 basis points as of 9:15 GMT on Tuesday, down from -128.2 basis points on March 6th.