Will RBA hike boost the Aussie?

We are seeing plenty of volatility from the Australian dollar. AUD/USD is trading at 0.6883 in European trade, up 0.98% on the day. The Australian dollar has recovered most of its losses from Friday, when the pair slipped 1.28%.

RBA set to hike, but by how much?

All eyes are on the RBA, which holds its monthly policy meeting on Tuesday. The meeting is live, as it’s not clear if the Bank will raise rates by 25bp or 50bp. The most likely scenario is a 50-bp move, with the cash rate at a low 0.85%. A supersize 75bp move is a possibility but unlikely, and would likely give the Aussie a short-lived jump – the markets remain jittery in the current environment which will make it difficult for AUD/USD to claw back to the symbolic 70 level.

Inflation remains the RBA’s paramount concern. The inflation rate of 5.1% is among the lowest in the OECD and well below the UK and US, which are running close to double digits. Still, there is no sign of Australia’s inflation peaking, and that has the RBA worried about inflation expectations becoming unanchored. There are no indications of a recession, but GDP in Q1 slowed significantly to 0.8%, compared to a robust 3.6% in the fourth quarter. If the RBA continues to deliver 50bp rate hikes, economic activity will slow and negative growth would become a very real possibility.

US markets are closed for a holiday, but things will heat up during the week, with the FOMC releasing the minutes of its June meeting. The Fed appears intent on continuing to raise rates aggressively, with Fed Chair Powell saying last week that curbing inflation was his primary task right now. Last week Powell said it was important to prevent inflation expectations from becoming anchored, adding that restoring price stability was paramount, even if that mean negative growth. On Friday, the Atlanta Fed GDP tracker indicated that the US is likely already in a recession, with the economy contracting by 2.1% in Q2, which together with the Q1 decline of 1.6% would mean the economy is in recession.

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AUD/USD Technical

• AUD/USD is testing resistance at 0.6849. Above, there is resistance at 0.6933
• There is support at 0.6732 and 0.6648

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