AUD/USD price forecast after the RBA’s surprise rate hike

This week, one of the two central banks scheduled to release their monetary policy surprised markets with a bigger than expected rate hike. In Australia, the Reserve Bank of Australia (RBA) lifted the cash rate by 50bp while the market participants expected a 25bp rate increase.

It is the second time this year that the RBA raised the cash rate, which now stands at 0.85%. It may look high compared to the interest rate level during the COVID-19 pandemic, but the cash rate is near its lowest level ever from a historical perspective.

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In other words, financial conditions remain accommodative in Australia. This is especially true if we calculate the interest rate adjusted for inflation. Inflation runs at 5.1%, and so the real interest rate is way below zero.

Why did the RBA hike more than the market expected?

As mentioned earlier, inflation is the main reason for the 50bp rate hike. COVID-19 supply bottlenecks as well as the war in Ukraine, triggered a sharp move higher in the price of goods and services in Australia.

Moreover, the local floods earlier in the year put further pressure on prices. Hence, the RBA felt the need to act more than the market expected in the hope that it would give a strong signal that it does not tolerate inflation at these levels.

Speaking of higher inflation, while elevated, it remains below inflation rates seen in other advanced economies. And this is, perhaps, why the markets chose to fade the RBA’s decision, as seen in the AUD/USD exchange rate that spiked higher on the news, only to reverse all of the gains.

AUD/USD remains in a bearish trend

The news that the RBA has lifted the cash rate by more than it was priced in the markets triggered a move higher in the AUD pairs. But at least in the AUD/USD exchange rate, the move was quickly retraced.

The currency pair is in a downtrend, and only a daily close above 0.76, the previous lower high level, would invalidate the bearish trend. While inside the channel, the bias remains bearish.

Despite the surprise, investors know that the Fed in the United States is due to release its policy one week from today. 50bp are priced in, and so the funds rate will reach 1.5% in the United States – much higher than the 0.85% in Australia.

Hence, the interest rate differential still favors a strong US dollar.