Forex Market: AUD/USD at fresh 3-week peak as RBA surprisingly hikes rates by 25 bps

AUD/USD registered a fresh three-week high on Tuesday after the Reserve Bank of Australia delivered an unexpected rate hike, which brought borrowing costs to their highest level since April 2012.

The RBA raised its cash rate by 25 basis points to 4.10% at its June policy meeting earlier on Tuesday, while confounding market expectations of a pause.

This has been the 12th rate hike since May 2022, while the central bank kept the door open for more policy tightening.

RBA policy makers stated that the upside risks to Australia’s inflation outlook had increased, mostly because of service price inflation.

RBA Governor Philip Lowe said that the rate increase served to provide confidence that inflation would go back to target by mid-2025.

“With increasing public and non-public sector wages, higher monthly CPI, increasing property prices and still buoyant retail sales, the battle is ongoing. Rates could be set to stay higher for longer,” Russel Chesler, head of investments at VanEck, was quoted as saying by Reuters.

“Given the RBA’s mandate, the central bank may have no choice but to hike rates even higher than markets have anticipated.”

Futures markets are now pricing in a 60% chance of another interest rate increase next month.

As of 8:58 GMT on Tuesday AUD/USD was gaining 0.62% to trade at 0.6658. During the late phase of the Asian session the major Forex pair went up as high as 0.6685, which has been its strongest level since May 16th (0.6710).

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 -64.9 basis points as of 8:15 GMT on Tuesday, up from -70.7 basis points on June 5th.