RBA delivers dovish surprise to undercut the recent AUDUSD rally

At its monthly meeting this afternoon, the Reserve Bank Board as widely expected raised its official cash rate for a third consecutive time by 50bp from 1.35% to 1.85%.

However, following the release of a better-than-feared Q2 inflation print last week the RBA followed the lead of the FOMC last week and delivered a dovish surprise relative to expectations.

While the door remains open for future rate hikes to return inflation within the targeted band, the second paragraph noted the path to a soft landing was a "narrow one."

"The Board places a high priority on the return of inflation to the2–3percent range over time, while keeping the economy on an even keel. The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments."

In the final paragraph, the RBA noted that policy is "not on a pre-set path" and that "The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market."

Before today's "further step in the normalisation of monetary conditions", evidence was mounting that the impact of the RBA's previous three rate hikes was having the desired impact and cooling the economy.

Housing prices in July fell at the fastest pace in 40 years, consumer confidence is back to GFC levels, and the rate of consumer spending is slowing. Whether by enough to offset an expected rise in inflation to 7¾% by end-22 remains to be seen.

Our base case remains for a fourth consecutive50bp rate hike in September, followed by a 25bp rate hike in October or November, which will take the cash rate to 2.60%, and into mildly restrictive territory before year-end.

The RBA is then likely then pause to allow time to assess the full impact of the rate hiking cycle on inflation, growth, and labour market data.

What does it mean for the AUDUSD?

Following the release, the AUDUSD fell from .7050 to .6950, leaving the AUDUSD vulnerable to a deeper retracement towards support at .6900/80.

The .6900c/80c level has provided support over the past week and should do so again courtesy of the Fed's dovish FOMC surprise last week.

Source Tradingview. The figures stated are as of August 2nd, 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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