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Forex Market: AUD/USD gains as RBA signals more policy tightening ahead

AUD/USD extended gains from the prior trading day on Tuesday, after Reserve Bank of Australia Governor Philip Lowe signaled more interest rate hikes in the coming months.

Gains, however, seemed limited by concerns over slowing global economic growth.

The minutes of RBA’s June meeting, released on Tuesday, revealed the bank’s board had discussed increasing the cash rate by either 25 basis points or 50 basis points and decided to go with the second option since monetary policy had to be normalized to stave off inflation.

Reserve Bank of Australia Governor Philip Lowe said earlier Tuesday that price pressures would continue to build internationally and that inflation in Australia would probably rise to 7% by the end of 2022 – well above the RBA’s long-term inflation objective of 2% to 3%.

“As we chart our way back to 2 to 3% inflation, Australians should be prepared for more interest rate increases,” RBA’s Lowe said in a speech.

“The level of interest rates is still very low for an economy with low unemployment and that is experiencing high inflation.”

The RBA Governor also said sizable interest rate hikes of 75 basis points were not likely and played down the chance of rates reaching 4% by the end of this year. Matching such market bets would require the most considerable tightening cycle in modern RBA history, Lowe said, which would severely impact consumer spending.

Meanwhile, some analysts believe the Aussie’s longer-term trajectory will be driven more by the global growth outlook.

“I think the bigger driver for the Aussie will be global factors rather than local influences, and we are now forecasting the U.S. dollar to increase this year based on our expectation for a sharp slowdown. We think the Aussie will push to 65 U.S. cents by the end of this year,” Carol Kong, FX strategist at Commonwealth Bank of Australia, was quoted as saying by Reuters.

As of 8:16 GMT on Tuesday AUD/USD was edging up 0.35% to trade at 0.6974. Last week the major Forex pair went down as low as 0.6850, which has been its weakest level since May 12th (0.6828).

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 18.5 basis points (0.185%) as of 8:15 GMT on Tuesday, down from 26.4 basis points on June 20th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.6954
R1 – 0.6992
R2 – 0.7035
R3 – 0.7073
R4 – 0.7112

S1 – 0.6911
S2 – 0.6873
S3 – 0.6830
S4 – 0.6788

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