Following a dovish pause in April, the Reserve Bank of Australia (RBA) added to its ten previous interest rate hikes to raise its cash rate by 25bps to 3.85%, as inflation remains above its target rate. While the market was expecting another pause, the AUDUSD currency pair reaped the benefits, soaring to a one-week high.
At 3.85%, the Australian interest rates are at their highest since 2012, as 7% inflation remains sticky above the 2%-3% target. With an unemployment rate of 3.5%, near a 50-year low, wage pressures are forcing the RBA to keep the door open for further hikes as they aim to bring inflation down to the target in a respectable timeframe. However, the AUDUSD bullish run could be short-lived. The Federal Reserve will come under the spotlight tomorrow to deliver their monetary policy decision, as a widely expected 25bps hike looms.
Technical
Following the announcement, the AUDUSD currency pair is up 1.3% to $0.6714. The 4H chart shows a peak on the 20th of April, whereafter US dollar strength led to a selloff that bottomed on Friday. As the Australian dollar regains strength on a hawkish RBA, the bulls have retraced most of the losses, breaching the 61.8% Fibonacci retracement golden ratio at $0.6696 on its way toward the 78.6% retracement level at $0.6729.
The current momentum could be at risk with the Federal Reserve’s interest rate decision due tomorrow. If the Fed provides a hawkish outlook to put away speculation of rate cuts in their next meeting, the currency pair could reverse to retest the golden ratio at $0.6696. From there, the Fibonacci midpoint at $0.6673 could become topical, as a breakdown could lead the bears back to resistance at $0.6661 (R1). A full retracement of today’s gains could open a move to lower support at the 38.2% Fibonacci retracement and the daily pivot point at $0.6649 and $0.6634, respectively, before reaching the 23.6% Fibonacci retracement at $0.6621.
Conversely, a more dovish tone from the Fed could spur the bullish rally toward the 78.6% Fibonacci retracement at $0.6729, where a successful breakout could lead to a retest of the resistance at $0.6755. If the currency pair maintains its momentum, the bulls could re-attempt a breakout from the psychological level at around $0.6793, where they previously failed to move higher.
Summary
The AUDUSD currency pair soared on the surprise interest rate hike from the RBA. However, the US Federal Reserve will have its say tomorrow, where a hawkish tone could retrace the daily gains back toward $0.6696 and $0.6673.
Sources: Koyfin, Tradingview, Reuters
