Aussie in calm waters ahead of RBA

The Australian dollar went on a wild ride late last week. AUD/USD jumped 1.27% on Thursday, only to cough up most of these gains on Friday.  The Aussie is showing little movement today, as the markets eye the Reserve Bank of Australia rate decision on Tuesday.

RBA poised for back-to-back rate hikes

The RBA is widely expected to raise interest rates back-to-back, for the first time since 2013. It’s not clear what the size of the hike will be, with the most likely scenario being a 40-bps increase, which would raise the cash rate to 0.75%. If the RBA opts for a modest 25-bps hike, investors could be disappointed and the Australian dollar could lose ground.

The RBA started its rate-hike cycle last month and is expected to raise rates to 3% or even higher, which means that the Bank will be raising rates in the second half of the year and into 2023. The aggressive rate hiking by the RBA will help the Australian dollar keep pace with the US dollar in terms of the US/Australia rate differential.

US yields climbed on Friday after the May nonfarm payrolls were stronger than expected. The economy added 390 thousand jobs, above the forecast of 325 thousand and indicating that the labour market remains robust. The report has solidified expectations that the Fed will deliver 50-bps hikes at the June and July meetings.

Federal Chair Powell has signalled that the Fed will take a pause from rate hikes in September, but that view is by no means unanimous. On Thursday, Fed Vice Chair Brainard said the Fed should not take a break from rate hikes in September, and that the Fed might continue with 50-bps hikes if inflation doesn’t peak.

What makes Brainard’s comments noteworthy is that she is considered a leading dove on the Fed, which is indicative of the hawkish pivot the Fed has taken as inflation continues to accelerate. Echoing Brainard, Fed member Mester said that the Fed had to act aggressively to contain inflation and that could mean an increase at the September meeting.

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AUD/USD Technical

• AUD/USD is testing resistance at 0.7207. Above, there is resistance at 0.7252
• There is support at 0.7121 and 0.7076

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