Forex Market: AUD/USD rebounds from a 25 1/2-month low on rather hawkish RBA Minutes

AUD/USD advanced for a third straight trading day on Tuesday, rebounding from last week’s 25 1/2-month low, after the Minutes of the Reserve Bank of Australia’s July policy meeting showed interest rates in the country were still too low for an economy with a tight labor market and facing a period of high inflation.

RBA policy makers held discussions about a neutral rate – neither an expansionary nor a contractionary one, and agreed the current interest rate level of 1.35% still remained well below that.

“Members agreed that further steps would need to be taken to normalize monetary conditions over the months ahead,” the Minutes stated.

“Members viewed it as important that inflation expectations remained well anchored and that the period of higher inflation be temporary.”

“The RBA board has lifted the intensity of its rhetoric,” Westpac economist Bill Evans wrote in a research note.

“Another 50 basis points in August seems highly likely.”

According to David Plank, head of Australian economics at ANZ, the Reserve Bank of Australia may deliver four more consecutive rate hikes of 50 basis points, starting in August, which would bring the cash rate to 3.35% by November.

Meanwhile, Reserve Bank of Australia deputy governor Michele Bullock said on Tuesday that households in the country were well placed to withstand higher interest rates, as they had amassed AUD 260 billion in excess savings during the pandemic.

As of 8:45 GMT on Tuesday AUD/USD was gaining 1.12% to trade at 0.6888. Last week the major Forex pair went down as low as 0.6681, which has been its weakest level since June 1st 2020 (0.6648).

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 -13.6 basis points (-0.136%) as of 8:15 GMT on Tuesday, up from -22.7 basis points on July 18th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.6817
R1 – 0.6849
R2 – 0.6887
R3 – 0.6919
R4 – 0.6952

S1 – 0.6779
S2 – 0.6746
S3 – 0.6709
S4 – 0.6671