Forex Market: AUD/USD retreats as RBA dismisses market pricing for a rate hike next year

AUD/USD snapped a two-day streak of gains on Tuesday, after Reserve Bank of Australia Governor Philip Lowe again dismissed market pricing for a rate hike in 2022, as, in his view, recent macro data and projections do not warrant such a decision.

Markets are pricing a first hike from the current 0.10% level to 0.25% by June 2022 and further rate increases by the end of 2022. Market players are betting that global inflationary pressures will last for a longer period than what major central banks forecast.

Meanwhile, the minutes from the Reserve Bank of Australia’s November policy meeting showed that the country’s economy was expected to rebound in the fourth quarter this year and in Q1 of 2022 as restrictive measures are eased further and vaccination campaign accelerates.

“Timely data on mobility, spending, and labor demand pointed to a strong rebound in parts of the country that had been most affected by the Delta outbreak,” the Minutes stated.

The RBA board expressed confidence that, by mid-2022, economic activity would be broadly in line with the pre-Delta recovery path.

According to the document, policy makers expect underlying inflation to be around 2.25% by the end of 2022 and around 2.50% by the end of 2023. Additionally, headline inflation is forecast to remain above underlying inflation in the near term as a result of higher fuel prices.

As of 9:47 GMT on Tuesday AUD/USD was inching down 0.08% to trade at 0.7339, while moving within a daily range of 0.7333-0.7368. The major currency pair has retreated 2.39% so far in November, following a 4.03% gain in October.

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 -3.19 basis points (-0.0319%) as of 9:15 GMT on Tuesday, down from -2.8 basis points on November 15th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7346
R1 – 0.7370
R2 – 0.7395
R3 – 0.7420
R4 – 0.7444

S1 – 0.7320
S2 – 0.7296
S3 – 0.7271
S4 – 0.7246