Next Tuesday, the RBA meets again and is widely expected to raise the cash rate. Once again, the main question will be by how much.
Behind the RBA’s 50bp rate hike in June, concerns around higher inflation and “still very low level of interest rates”. Since the June decision, the RBA has since revised higher its inflation forecasts not once but twice and is now expecting inflation to peak around 7%.
Quashing expectations that higher inflation might prompt the RBA to follow the lead of the Federal Reserve and raise rates by a supersized 75bp, Governor Lowe last week said that the Board would consider only the merits of raising rates by 25bp or 50bp at the July meeting.
The Governor also said that to determine whether a 25bp or 50bp hike was most appropriate, “the Board will be paying close attention to developments in the global economy, the evolution of labour costs and how household spending is responding to higher interest rates.”
Today’s stronger-than-expected retail sales data for May (0.9% MoM vs 0.4% expected) indicates household spending remains resilient in the face of higher interest rates and lower housing prices. Combined with an imminent 5.2% rise in the minimum, the odds of a 50bp rate hike are high.
Furthermore, developments in the global economy, including surging inflation and hawkish central banks, provide the closing argument for a 50bp rate hike next week.
As such, the view as outlined here remains for a 50bp rate hike in July, followed by 25bp rate hikes in August, September, October, and November, taking the cash rate to 2.35%. Notably, this is considerably less than the 3.35% currently price in the interest rate market.
What does it mean for the AUDUSD?
At this point, recessionary fears and tumbling metal prices are weighing on the local unit and overshadowing next week’s RBA meeting.
Additionally, the one-month countdown to the July 27/28 FOMC meeting has commenced. Expectations are for a follow-up 75bp rate hike taking the Feds Fund rate to a range of 2.25-2.50%. Yield differentials will remain firmly in favour of the U.S dollar.
Technically, the inability of the AUDUSD to drive away from the critical .6850/30 support zone leaves the AUDUSD vulnerable to a deeper decline towards .6500c. On the topside, the level to keep in mind is the .7070 high from the 16th of June.
Source Tradingview. The figures stated are as of June 29th 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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