AUD/USD bulls await Fed’s decision

The AUD/USD pair stuck to a sideways drift on Tuesday following an initial spike on the back of a hawkish Reserve Bank of Australia. AUD/USD traded between 0.7150 highs and a low of 0.7080 in New York.

The RBA surprises everyone with a 25bp move. Analysts at ANZ Bank explained, ”in what might be termed a ‘goldilocks’ move, the RBA decided that 15bp was too small, 40bp too much whereas a 25bp lift in the cash rate was a return to ‘business as usual.”’

In his post-meeting press conference, the Governor indicated that it was “not unreasonable to expect” the cash rate to eventually get to 2.5%. This is in line with our expectation for mid-2023, though we continue to think the cash rate will eventually need to move into the 3s – albeit not for some time after next year. Lowe also said that the RBA was ‘not inclined to deviate” from monthly moves of 25bp “unless there is a very strong argument to do so.’ A lift in underlying inflation to almost 5% by the end of this year might be viewed by some as meeting that threshold.”

As for the USD, the American currency came under pressure against a basket of currencies on Tuesday, as investors start to move to the sidelines ahead of the Fed. The dollar index (DXY) was last at 103.47, down 0.13% on the day, after reaching 103.93 on Thursday, the highest since December 2002. With inflation running at its fastest pace in 40 years, DXY hit a 20-year high on expectations the US central bank will be more aggressive than its peers while expecting a stronger US economy than that of the eurozone.

For the day ahead, investors are in anticipation of the Fed and expect the central bank to hike rates by 50 basis points at the end of a two-day meeting on Wednesday in order to combat soaring inflation. The markets are going to be listening closely to the comments by Chairman Jerome Powell for further clues on future rate hikes.