Australian Dollar Softens, ASX Perks Up After Mildly Hawkish RBA Hold

The Australian dollar softened while the ASX 200 reversed earlier losses after the Reserve Bank of Australia left the cash rate unchanged at 4.35%. Although the decision was widely expected, policymakers retained a mildly hawkish bias as inflation remains above target and uncertainty surrounding the economic outlook persists. Attention now turns to upcoming inflation and employment data, alongside the FOMC meeting, for clues on the next move in Australian markets.

 

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Australian Dollar Eases While ASX 200 Perks Up Following RBA Hold

RBA Holds Cash Rate at 4.35% and Maintains Hawkish Bias

• RBA left the cash rate unchanged at 4.35%
• Today's policy decision was unanimous
• Headline and underlying inflation remain too high
• Financial conditions have tightened this year following three increases in the cash rate target
• Unemployment rose more than expected in April, although other labour market indicators remain more resilient
• Uncertainty surrounding the outlook for domestic economic activity and inflation remains elevated
• Resolution of the conflict in the Middle East remains at an early stage
• There are plausible scenarios in which inflation is higher and economic activity is weaker than projected in the May baseline forecasts

 

RBA Maintains Hawkish Bias Despite Holding Rates

The RBA held the cash rate at 4.35%, as widely expected, while maintaining a slightly hawkish tone in its statement. Yet the modest pullback in the Australian dollar suggests markets were either unconvinced by the hawkish messaging or had largely priced it in beforehand.

Weaker employment and growth figures allowed the RBA to remain on hold after three consecutive hikes. However, elevated inflation and uncertainty surrounding the outlook for growth and inflation mean it is unlikely to abandon its hawkish bias, even if some suspect its next move may be lower.

Yet this is not a widely held view, with Westpac reiterating the potential for two more hikes beginning in August.

Source: RBA, LSEG

 

 

Markets Unmoved by Expected RBA Decision

The market reaction was fairly muted, which makes sense given there was little scope for the RBA to surprise. The RBA's forecasts pencilled in a cash rate of 4.7% by December, implying scope for a further 35bp of tightening from current levels. However, there was little in today's statement to suggest the RBA remains on track to hike even once, despite retaining the option to do so.

The weekly candlestick chart (bottom right) shows the Australian dollar is higher against all major currencies except the euro so far this week, posting its strongest gains against the New Zealand dollar. However, much of that strength appears linked to positive developments surrounding the Middle East peace agreement, and AUD would likely have struggled to outperform so broadly without that tailwind.

AUD/USD is attempting to turn lower beneath 71c, although it still risks another push higher if the peace agreement is formally signed. Overall, my bias remains for a move towards 69c once the current swing high is established. AUD/JPY has also weakened since the BOJ raised rates by 25bp, while the Australian dollar has posted modest losses against the British pound, Swiss franc, euro and Canadian dollar. Attention now turns to the FOMC meeting to see whether it can inject fresh volatility into currency markets.

Source: ICE, TradingView

 

 

Inflation and Jobs Data in Focus Ahead of Next RBA Meeting

Perhaps we'll have a better indication of if and when the RBA may next move, with inflation, employment and household spending data all due before the next meeting. The Australian Bureau of Statistics (ABS) will release the monthly CPI indicator, labour force report and household spending indicator. This combination of data has greater potential to influence the RBA's next decision than today's meeting itself.

 

 

 

ASX 200 Futures (SPI 200) Technical Analysis

Equity markets have taken a positive cue from today's meeting, with the ASX 200 fully reversing its earlier losses at the time of writing. Note that it is trading just above an options cluster around 8,900, where elevated put and call activity could make it a near-term magnet for prices. However, a daily close above this level would likely pave the way for a move towards 9,000.

Notice the falling open interest on SPI 200 futures, which suggests much of the rally has been driven by short covering. Still, with sentiment buoyant and momentum on its side, a break higher remains the path of least resistance heading into the FOMC meeting.

Source: ASX, ASX24, Forex.com, TradingView

 

 

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-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge