Aussie stable ahead of RBA decision

It was another tough week for the Australian dollar, as AUD/USD fell 2.53%. In the European session, AUD/USD is trading quietly at 0.7046.

All eyes on RBA

The RBA will be in the spotlight, as it holds its policy meeting on Tuesday. This meeting is live, as it’s unclear what policy makers have planned. There’s little doubt that the RBA is poised to embark on a rate-hike cycle, keeping in sync with the Federal Reserve and other major central banks.

The uncertainty lies in whether the Bank will raise now, and if so, by how much. Inflation continues to spiral, hitting 5.1% in the first quarter. RBA Governor Lowe has long insisted that he would not raise rates until wage growth rose in order to ensure that inflation was not transitory. Well, wage growth is accelerating and nobody is using the T-word when describing inflation. With a robust labour market, the conditions are right for changing gears and moving away from the bank’s loose monetary policy.

A rate hike of 0.40% would be called for, but there is the issue of the federal election later this month. The RBA does not want to deliver an oversize rate hike in the middle of an election campaign, but at the same time needs to send a message to the markets that it is determined to contain inflation – standing on the sidelines would risk credibility. The compromise (which is the consensus) is that the RBA will raise rates, but only by 0.15%, with a further hike at the June meeting. A small hike will not send inflation on its heels by any stretch, but will send a slightly hawkish message, as this would be the first rate hike since 2011.

With the Federal Reserve widely expected to raise rates by a half-point at its meeting on Wednesday, the Aussie could find itself under pressure this week, as it struggles to remain above the symbolic 0.70-line.

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AUD/USD Technical

• There is support at 0.6992 and 0.6923
• AUD/USD has resistance at 0.7125 and 0.7194

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