Aussie Dollar Climbs as RBA Rate Hike Expectations Intensify

Key Moments

Rally Extends as Policy Expectations Turn More Hawkish

AUD/USD continues to attract buyers, pushing the pair toward 0.7170 during Wednesday’s early Asian session and extending those gains into early European trade. The Australian Dollar is trading near a three-year peak against the US Dollar as investors raise their expectations for a near-term rate hike by the Reserve Bank of Australia (RBA).

The positive tone in the pair remains intact while spot holds above the 100-day exponential moving average (EMA), supported by a bullish Relative Strength Index (RSI). Immediate downside support is identified at 0.7120, while the nearest resistance on the upside is seen at 0.7240.

RBA Outlook Firmed by Inflation Risks

Analysts increasingly anticipate that the RBA will lift interest rates next week following a warning on inflation from a senior central bank official the previous day. RBA Deputy Governor Andrew Hauser said on Tuesday that the rise in oil prices will push inflation above the forecast 4.2%, and warned that the conflict in the Middle East could force an interest rate increase within days. Hauser added that the response depends on the size and persistence of the price shock, which is very uncertain.

According to Reuters, markets are now pricing in nearly a 75% likelihood that the RBA will raise its policy rate by 25 basis points to 4.1% next week, as elevated oil prices stemming from Middle East tensions heighten inflation risks.

Technical Setup: Bullish Bias Supported by Momentum and Volatility

On the daily chart, AUD/USD retains a constructive short-term outlook as the pair trades above the rising 100-day EMA and hovers near the upper Bollinger Band, underscoring sustained upside momentum. The widening of the Bollinger Bands in recent sessions signals an expansion in volatility consistent with the latest upward move. RSI in the mid-60s stays in positive territory, below overbought thresholds, reflecting firm buying interest with only modest signs of fatigue.

Initial support is positioned at 0.7120, protecting the psychological 0.7100 area and the middle Bollinger Band located just under 0.7050. A daily close beneath this support zone would bring deeper levels into view at 0.7020 and then 0.6960, where the broader uptrend anchored by the 100-day EMA could come under pressure. On the topside, immediate resistance is seen at 0.7240, followed by 0.7300, where an extended move into the upper Bollinger Band region may moderate further gains.

Australian Dollar: Key Macro Drivers

One of the primary influences on the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia. As Australia is a resource-rich economy, the price of its major export, Iron Ore, is also a crucial factor. The strength of the Chinese economy – Australia’s largest trading partner – plays an important role, alongside domestic inflation, economic growth, and the Trade Balance. Broader market sentiment is another driver, with risk-on conditions generally supportive for the AUD, while risk-off phases tend to weigh on the currency.

Impact of RBA Policy on AUD

The RBA affects the AUD primarily by determining the interest rate at which Australian banks lend to each other, which then ripples through to broader borrowing costs in the economy. The central bank’s main objective is to keep inflation within a 2-3% range by moving interest rates higher or lower as needed. Comparatively higher interest rates versus other major central banks are typically supportive of the AUD, while relatively lower rates tend to be negative. The RBA can also deploy quantitative easing or tightening to influence credit conditions, with the former viewed as AUD-negative and the latter as AUD-positive.

China, Iron Ore, and Trade Balance as AUD Catalysts

China’s economic performance is particularly significant for the AUD because of Australia’s strong export ties. When the Chinese economy is expanding robustly, demand for Australian raw materials, goods, and services tends to rise, lifting demand for the AUD. Slower-than-expected Chinese growth usually has the opposite effect. As a result, surprises in Chinese growth data often translate quickly into moves in the Australian Dollar and its currency pairs.

Iron Ore, Australia’s largest export, is another critical variable. If Iron Ore prices increase, the AUD generally benefits as aggregate demand for the currency rises. Falling Iron Ore prices tend to weigh on the currency. Higher prices also make a positive Trade Balance more likely, which is typically favorable for the AUD. The Trade Balance, reflecting the gap between export earnings and import costs, can support the currency when it is positive due to sustained foreign demand for Australian exports.

Key AUD/USD Levels at a Glance