AUD/USD falls below 70c after RBA lifts interest rate by 50 bps

Australia’s central bank increased its cash rate by 50 bps on Tuesday, marking a 175-basis point increase in three months and the sharpest tightening phase since 1994.

Today’s statement also revised the central bank's forecast for CPI inflation from seven percent in July to around 7¾ percent over 2022. Looking ahead, the RBA expects inflation to be a little above four percent over 2023 and around three percent over 2024.

Inflation in Australia

Australia's inflation rate climbed from 5.1% in the first quarter to 6.1% in the second quarter of 2022. When compared with market forecasts of 6.2%, this was the highest print increase since Q2, 2001 and stems from the increase in food, fuel and dwellings.

Compared to the first quarter, consumer prices went up 1.8% in the second quarter hence being the second highest figure increase since the introduction of GST. The Core CPI, which the central bank prefers as an inflation indicator, rose 4.9% year-on-year, the fastest pace since 2003, far exceeding the RBA’s two to three percent target.

Despite the steep rate hikes and measures taken by the RBA, inflation in Australia is yet to be under control.

What is the interest rate outlook?

According to the RBA's statement, 'The Board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path.' In other words, the interest rate is likely to keep increasing but there are more mixed elements to take into consideration as the decision is not set in stone.

Last week in a major economic statement to parliament, Australia Treasurer Jim Chalmers warned that the local economy is forecast to slow with the economic growth being cut down by half a percent each year for the next three years.

The warning is poised to leave the RBA in an even more complicated situation to balance between the inflation pressure and the cloudy outlook of the economy.

Up to this week, the market predicts the interest rate will move as high as three percent by December and peak at 3.3% by March 2023.

AUD/USD analysis

During the past two weeks, the Australian dollar has been on the rise and recently regained the USD 70c threshold. In theory, the RBA’s decision today should continue to fuel momentum for the Australian dollar but there is growing discussion about whether the RBA is falling behind the curve when tackling inflation as even after today’s rise, the interest rate remained below the neutral level of two percent. Therefore, many believe the central bank may play a game of catch-up in the following months.

As always, there are uncertainties ahead.

First, the outbreak of geopolitical tension between China and the US on the issue of Taiwan has the potential to deteriorate the risk appetite for currencies like the Australian dollar. The dollar and like currencies are closely connected to commodity prices that will only thrive when the regional economy is looking to the upside.

Secondly, the US job data, which is to be unveiled this week, may trigger a new round of discussion about the Fed’s tightening and push the US dollar up. Based on the daily chart print, the AUD/USD fell sharply after the RBA decision and breached the key support at 0.6996. Next support will be an eye on the level of 0.6926 where the 20-day moving average sits.

If the price keeps moving lower, the possibility of breaking through the weeks-long ascending trajectory will result in an overturn to bear-biased momentum.

AUD/USD daily chart