AUD/USD jumps, RBA likely to pause

• Markets widely expect RBA to pause rates
• Fed expected to raise rates by 25 bp
• US ISM Mfg. PMI contracts but beats estimate

The Australian dollar has started the week with gains. In the North American session, AUD/USD is trading at 0.6639, up 0.35%.

RBA expected to pause rates

The Reserve Bank of Australia is widely expected to pause rates for a second straight month at Tuesday’s policy meeting. The latest inflation numbers indicated that inflation fell from 7.8% to 7.0% in the first quarter. This is much too high for the RBA, but if inflation continues to drop in large increments, the central bank may be able to forego further rate hikes.

The RBA has tightened dramatically over the past year, and the rate hikes are having an effect on the economy and on lowering inflation. The markets have priced in a 100% chance of a pause on Tuesday, according to the ASX RBA rate tracker, but some analysts feel there is an outside chance of a 25-basis point hike, given that inflation remains much higher than the 2% target. The RBA is trying to guide the economy to a soft landing, and the deceleration in inflation is welcome but poses a challenge as to whether further rate hikes are needed or whether will inflation continue to fall without additional tightening.

The Fed meets a day after the RBA, and the markets have priced in an 89% chance of a 25-basis point hike, according to the CME Group, up from 83% on Friday. What will be interesting is if there any dissenting votes, after a unanimous vote in March to raise rates by 25 bp. With inflation heading lower, there are concerns that the Fed’s aggressive rate tightening could push the economy into a recession and that it’s time for a pause.

The banking crisis, which has claimed First Republic Bank as its most recent victim, has resulted in tighter credit conditions which are equivalent to a 25-bp or even a 50-bp rate hike. That should translate into the Fed winding up its tightening cycle earlier than it anticipated, and Wednesday’s decision could well be the final rate hike in the current cycle.

In the US, the ISM Manufacturing PMI rose to 47.1 in April, above the forecast of 46.6 and the March reading of 46.3. Manufacturing continues to falter and has contracted for seven straight months, with readings below the 50.0 level.

.

AUD/USD Technical

• AUD/USD is testing resistance at 0.6632. The next resistance line is 0.6664
• 0.6558 and 0.6434 are providing support

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.