RBA Holds Rates, Issues Hawkish Guidance in Response to Inflation Risks

RBA, AUD/USD Update

RBA Maintains Interest Rate at 4.35%, Warns Rate Hikes Are an Option

The Reserve Bank of Australia (RBA) voted to keep interest rates unchanged at 4.35% at its meeting earlier this morning, in line with consensus. The Board pointed to progress in goods inflation helping to lower price pressures, but services inflation has eased only slightly – contributing to potential upside risk.

The Board also signalled that demand outpaces supply which adds to existing inflation concerns but admitted that the dynamic is approaching a more sustainable balance. The RBA therefore, is intent on keeping all options on the table, including another rate hike, to address threats to the 2-3% inflation target.

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The RBA increased interest rates as recently as November 2023 as Australia has found it difficult to contain the general rise in price pressures at a time when other major central banks are considering when to cut their respective benchmark interest rates.

AUD/USD Broadly Higher after Hawkish Guidance on Inflation

The Australian dollar lifted on Tuesday after a perceived hawkish meeting from the RBA but it may take more than that to arrest the broader decline. AUD/USD dropped sharply at the start of the year – mainly as a result of US markets stepping back from prior expectations of aggressive rate cuts to materialize sooner than the Fed had indicated. More recently the pair consolidated within a bear flag pattern before witnessing a bearish continuation with follow through – breaking below notable levels/zones of support; including the confluence zone around 0.6580 and the 200-day simple moving average, as well as the prior zone of resistance (currently being tested) around 0.6520.

Bearish continuation remains constructive if bulls are unable to close above the 0.6520 level. In the absence of the close above 0.6520, further levels of support emerge at 0.6460 and 0.6365. Expect recent Chinese woes to weigh on potential AUD upside as the world’s second largest economy faces major challenges. Chinese regulators have restricted the borrowing of shares in an effort to clamp down on short selling in the latest attempt to halt plummeting stock indices. China continues to struggle with an ailing real estate sector which contributes around 25% – 30% of Chinese GDP while trying to fight off deflation risks.

AUD/USD Daily Chart

Source: TradingView, prepared by Richard Snow

AUD/USD: Retail trader data shows 71.57% of traders are net-long with the ratio of traders long to short at 2.52 to 1.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUD/USDprices may continue to fall.

Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed AUD/USD trading bias.

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX