Aussie lower ahead of RBA decision

The Australian dollar is under pressure at the start of the new trading week. AUD/USD is trading at 0.6735 in Europe, down 0.50%.

RBA expected to hike by 25 bp

The RBA is widely expected to raise rates by 25 basis points on Tuesday, which would bring the cash rate to 3.60%, the highest level in a decade. The RBA’s aggressive rate tightening cycle has not been as effective as the central bank had hoped, as inflation has been stickier than expected. Australia’s monthly CPI for January dropped to 7.4%, down from 8.4% a month earlier. This drop indicates that rate hikes are having an impact on the economy, but there is a long road ahead before inflation falls back to the RBA’s target of 2-3%.

There was some positive news on Monday, as the Melbourne Inflation gauge for February showed a drop in core inflation to 4.9% y/y, down from 5.3% in January. The headline figure remained unchanged at 6.3% y/y.

Australian Treasurer Jim Chalmers has said he is “cautiously hopeful” that inflation has peaked, but it’s likely that the RBA will have to hike rates at least one more time before it can hit the pause button. Investors will be keeping a close eye on Governor Lowe’s rate statement, which will likely be hawkish given the stubbornly high inflation levels. Any hints about the need for further rate increases would likely be bullish for the Australian dollar.

In the US, it promises to be a busy week. The key events are Fed Chair Powell’s semi-annual testimony before Congress and the nonfarm payroll report, both of which could move the US dollar. The markets will be keeping a close eye on Powell’s remarks and whether he will sound less hawkish, given the recent string of unexpectedly strong US releases.

Nonfarm payrolls sizzled in January with 517,000 new jobs, but this is expected to be a one-time bump, with the estimate for February standing at 200,000. The surprisingly resilient labour market has the Fed concerned about wage pressures, and a strong wage growth release could raise expectations for further rate hikes.

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AUD/USD Technical

• AUD/USD is testing support at 0.6749. Below, there is support at 0.6660
• There is resistance at 0.6862 and 0.7025

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