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Forex Market: AUD/USD retreats as RBA keeps policy settings unchanged, raises economic forecasts

AUD/USD retreated on Tuesday, while staying within a relatively narrow range, after the Reserve Bank of Australia kept policy settings without change and reiterated that monetary conditions would remain accommodative until at least 2024. Still, the central bank raised its forecasts for Australia’s economy.

The official cash rate was kept intact at a record low level of 0.10% during the RBA’s policy meeting earlier on Tuesday, in line with market expectations.

Additionally, the bank’s three-year bond yield target was left without change at 0.10%, while it said that it would decide in July whether the yield target would be rolled over from the April 2024 bond to the November 2024 maturity.

According to analysts, a move not to roll over the bond yield target could be considered by market players as an early signal of policy tightening, which could bolster bond yields.

“We reiterate our view that the Bank will announce an additional A$100 billion of bond purchases in July, though we expect it to maintain the April 2024 bond for its 3-year yield target rather than switch to the November bond,” Marcel Thieliant, senior Australia economist at Capital Economics, was quoted as saying by Reuters.

Meanwhile, the RBA said it expected a gradual increase in consumer price inflation and wage growth, with CPI inflation seen rising temporarily above 3% during the second quarter.

The rate of unemployment in Australia is now expected to drop to 4.5% by the end of 2022, compared with a 5.5% rate in the bank’s prior forecast.

The RBA also raised its GDP growth forecast, as it now projects a 4.75% surge in 2021 and a 3.5% growth in 2022, due to accelerating business investment and stronger household spending.

As of 8:34 GMT on Tuesday AUD/USD was retreating 0.42% to trade at 0.7726, while moving within a daily range of 0.7712-0.7763. Last Thursday the pair climbed as high as 0.7818, or its strongest level since March 18th (0.7849). The major currency pair appreciated 1.53% in April, which marked its best monthly performance since December 2020.

Bond Yield Spread

The spread between 2-year Australian and 2-year US bond yields, which reflects the flow of funds in a short term, equaled -7.44 basis points (-0.0744%) as of 8:15 GMT on Tuesday, down from -7.0 basis points on May 3rd.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7744
R1 – 0.7781
R2 – 0.7804
R3 – 0.7842
R4 – 0.7880

S1 – 0.7721
S2 – 0.7683
S3 – 0.7660
S4 – 0.7637

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