RBA meeting minutes preview and what comes next for the AUD/USD

Tuesday, 11.30 am AEDT will see the release of the minutes for the RBA’s February Board meeting, where the RBA raised the cash rate by 25bp from 3.10% to 3.35%, accompanied by an unexpectedly hawkish shift.

In the statement that accompanied the decision, the RBA warned that further interest rate “increases” were needed to tame inflation which accelerated to an annual rate of 7.8% (from 7.3%) in Q4 2022.

“The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.”

The RBA also noted that if inflation were allowed to “become entrenched in people’s expectations, it would be very costly to reduce later.”

The hawkish messaging that accompanied the decision was reiterated by RBA Governor Lowe at his appearance before the Senate and House Economics committee last week. As such, there should be very little news to unpack from tomorrow’s minutes.

The Australian interest rate market is 75% priced for a 25bp rate hike at the RBA’s Board meeting in March, which would take the cash rate to 3.60%. The market expects the RBA’s terminal rate to reach 4.19% in July this year.

A higher RBA cash rate is, in theory, supportive of the AUD/USD. However, after the run of robust economic data in the US, the US interest rate market is expecting another 75bp of rate hikes which would take the Fed’s target rate to 5.25-5.50%. Approximately 115bp higher than where the RBA’s official cash rate is expected to peak.

The expectation that the US Fed Funds rate will keep pace and ultimately reach a higher level than the RBAs cash rate has weighed on the AUD/USD in recent weeks, along with some risk aversion selling and a weaker-than-expected Australian employment report.

Technical analysis

In our last article on the AUD/USD here in late January, we called for the AUD/USD then at .7050 to pullback towards uptrend support at .6900c and said, “at worst, the pullback may extend to the 200-day moving average at .6810 to work off overbought readings and to rebuild energy for its next leg higher towards .7300c.”

While a deeper pullback to .6700c (which is the wave equality target from the .7157 high) cannot be ruled out, the correction from the Feb .7157 high appears to be nearing completion.

Leaning against the strong support in the .68/67c region, we are moving to a mild positive bias looking for a retest and break of the February .7157 high.

AUD/USD daily chart