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AUD/USD defends gains after another rate hike

The Aussie continued in its bullish momentum, capitalizing on the broad US dollar weakness today.

The Australian dollar traded higher on Wednesday, jumping toward 0.69 as the short-term momentum changed to bullish after this week’s RBA monetary policy decision.

The central bank increased rates again

As predicted, the Reserve Bank of Australia (RBA) board members increased the official cash rate (OCR) by 0.25% (25 basis points (bps)) from 3.10% to 3.35% at their first monetary policy meeting of the year on February 7.

According to the most recent Reuters poll, the RBA was expected to increase interest rates by a quarter-point on Tuesday. As it continues its fight against inflation, the central bank will likely implement a fifth 0.25% rate hike in March.

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The central bank forecasts to see a drop in inflation this year due to both global and domestic causes. The central prediction predicts that cpi inflation would decrease to 4.4% this year and to approximately 3% by the middle of 2025.

Furthermore, in 2023 and 2024, it is projected that GDP growth would decrease to around 1.5%. The path to attaining a smooth landing continues to be tight.

China to boost the Australian economy

In other news, reducing tensions between the United States and China has provided the Australian dollar with some confidence. US President Joe Biden stated that the incident with the surveillance balloon did not harm US-China ties. 

Meanwhile, Fatih Birol, executive director of the International Energy Agency (IEA), has expressed confidence in China’s development, noting that “half of the rise in world oil consumption this year will come from China.”

Notably, Australia is China’s top trading partner, and growing optimism for a Chinese economic revival bolsters the Australian Dollar.

Earlier in the week, the headline Trade Balance for Australia decreased in December to A$12,237 million from A$13,245 million projected and A$13,201 million before. Also unfavorable was the decline in Export growth to -1.0% from 0.0%. Nevertheless, the recovery in Imports from -1.0% to 1.0% seems to have supported the Australian dollar.

Australian officials downplay the economic threat

Interestingly, despite a probable downturn, Australia’s Treasurer Jim Chalmers stated on Wednesday that a recession is not foreseen for the Australian economy.

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“The expectation of the Treasury forecasters is that higher interest rates combined with difficult global conditions will slow our economy considerably, but they don’t expect a recession here in Australia at this point.”

At the same time, Assistant Treasurer Stephen Jones stated, “We believe that inflation has reached its peak and is beginning to decline.”

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