Aussie extends gains on hawkish RBA minutes

• RBA says rate hike was needed to avoid larger increases
• Fed releases meeting minutes later today

The Australian dollar continues to rally. In the European session, AUD/USD is trading at 0.6567, up 0.15%. The Aussie has looked sharp, rising over 3% since November 14th.

RBA minutes detail rate hike

The Reserve Bank of Australia minutes, released earlier today, provided insights into the rate hike at the November meeting. The markets perceived the increase as a ‘dovish hike’ and the Australian dollar fell sharply in the aftermath of the decision. However, the minutes paint a different view of the hike, stating that it was intended to lower the risk of a “larger monetary policy response”, given stubbornly high inflation and a strong economy.

The minutes noted that inflation risks remain tilted to the upside and that the RBA’s forecast of inflation falling within the 2%-3% target range was based on one or two rate hikes. The RBA statement at the November meeting also warned that inflation remained too high but the markets didn’t pay much attention. Instead, investors focused on language that hinted that the bar had been raised for further rate hikes. The markets have priced in a pause in December at 95% but the minutes could serve as a strong reminder that the RBA is serious when it says further rate hikes are possible.

The Federal Reserve releases the minutes of its November meeting later today. At the meeting, the Fed held rates at 5.25-5.50% for a second straight time. Fed Chair Powell struck a hawkish note after the meeting, saying that inflation remained too high and left the door open to further rate hikes. I expect the minutes will contain a similar message but it’s questionable whether the markets will change expectations of a rate cut in mid-2024, even if the minutes are hawkish.

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AUD/USD Technical

• AUD/USD is putting pressure on resistance at 0.6587. Above, there is resistance at 0.6660
• 0.6526 and 0.6470 are providing support

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