Aussie extends losses, RBA talks hawkish

• RBA warns of upside risk to inflation
• Fed’s Powell says rate hikes still on the table

The Australian dollar has edged lower on Friday. In the European session, AUD/USD is trading at 0.6352, down 0.22%.

RBA raises inflation, employment forecasts

The Reserve Bank of Australia issued its quarterly monetary policy statement on Friday. The report warned of risks to the upside for inflation, while revising upwards its growth forecast. The economy is now expected to grow by 1.5% in the fourth quarter, up from 1.0%. The forecasts for headline and core inflation were also revised upwards, which raised the risk of inflation expectations becoming de-anchored.

The hawkish stance on inflation was similar to the RBA’s statement after this week’s rate hike, but the markets viewed that statement as a signal that the bar for further tightening had been raised. This led to the Australian dollar falling sharply despite the rate increase, which pushed the cash rate to 4.35%.

There is a split among economists if the RBA has wrapped up tightening and I suspect that there is also a difference of opinion among RBA members regarding future rate policy. Governor Bullock has stressed that rate decisions will be data-dependent, which means that key releases will likely have a strong impact on the direction of the Australian dollar.

The markets believe that the Fed is done with tightening, but Fed Chair Powell continues to sound hawkish. Powell said on Thursday that he would not hesitate to raise rates if needed in order to contain inflation and stated that he was “not confident” that inflation would return to 2% under the current policy. The markets still expect a rate cut in mid-2024, but Powell’s remarks led to the markets repricing a cut in July rather than June. It seems that the US economy will have to show much sharper growth before the markets buy into the Fed’s stance that rate hikes remain on the table.

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AUD/USD Technical

• AUD/USD is putting pressure on resistance at 0.6379. Above, there is resistance at 0.6449
• 0.6246 and 0.6176 are providing support

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