RBA underwhelms with modest rate hike

AUD/USD started the day with losses, but has since recovered. The Aussie is trading at 0.6540, up 0.37%.

RBA surprises with 0.25% hike

The Reserve Bank of Australia was widely expected to deliver a fifth consecutive hike of 50 basis points at today’s meeting, but the Bank surprised the markets with a small increase of 0.25%, which raises the cash rate to 2.35%. Governor Lowe had signalled that he was planning to ease up on the 0.50% increases, but with inflation running at 6.1% and not giving any indications of peaking, expectations were for the Bank to deliver at least one more 0.50% hike. Interestingly, the RBA statement acknowledged that inflation has not yet peaked and is expected to rise to 7.75% in 2002 before dropping to 4.0% in 2023.

If soaring inflation has not yet been beaten back, why did the RBA ease up? The answer is likely related to the continuing global economic uncertainty – China’s economy has been slowing and the war in Ukraine is escalating, with Europe facing an energy crisis this winter. The RBA statement included the usual mention that inflation and the labour market will be important factors in future rate policy, but Lowe & Co. will also be closely eyeing global developments. As well, the RBA is anxious to prevent a recession due to the sharp tightening in recent months, and a 0.25% hike will be easier for the economy to absorb than a 0.50% increase.

Over in the US, the Fed hasn’t signalled it will change its aggressive tightening stance just yet. Still, there are signs that the economy is slowing down. On Monday, the ISM Manufacturing PMI dropped to 50.9 from 52.9, barely in expansion territory and its lowest level since May 2020. Until inflation is unmistakably moving lower, the Fed is likely to continue delivering outsized rate hikes.

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AUD/USD Technical

• AUD/USD is putting pressure on support at 0.6433. The next support line is 0.6329
• There is resistance at 0.6503 and 0.6607

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