Australian dollar plunges after RBA hike

• RBA raises rates but eases tightening bias
• Australian dollar slides over 1%

The Australian dollar has recorded massive losses on Monday. In the European session, AUD/USD is trading at 0.6422, down 1.05%. The Aussie continues to show strong volatility after climbing 2.8% last week.

RBA hikes but markets not impressed

The RBA was expected to raise rates today, after holding rates for four straight times. Governor Michelle Bullock duly followed with a quarter-point rate increase, bringing the cash rate to 4.35%. Whenever central banks raise rates, the local currency often rises, but the opposite happened today as the Aussie took a huge drop. At first glance that may seem puzzling, but a close look at the RBA statement can help explain the market reaction.

The RBA statement noted that the rate increase was meant to ensure that “inflation would return to target in a reasonable timeframe.” This points to an easing of the RBA’s tightening basis and raised expectations that the RBA is close to wrapping up its current tightening cycle or may even be done. The statement included the usual rhetoric that future rate decisions would be data-dependent and rate hikes were still on the table, but the cat was out of the bag as the markets viewed today’s move as a ‘dovish hike’ and the Australian dollar took a tumble.

The battle to subdue inflation is by no means over and Governor Bullock acknowledged in the statement that “progress looks to be slower than earlier expected” and that the risk of inflation remaining “higher for longer” has increased. Investors don’t appear as concerned as Bullock about the inflation risk, as indicated by the Aussie’s sharp downturn.

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AUD/USD Technical

• There is resistance at 0.6526 and 0.6582
• 0.6449 and 0.6379 are providing support

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