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AUD/USD craters after RBA hikes rates

A 50 bps rate hike failed to spur any bullish momentum in the Australian dollar and it cratered instead.

The Australian dollar has been volatile today, dropping hard as traders reacted to the latest RBA decision and geopolitical tensions between the US and China.

RBA hikes rates

The Reserve Bank of Australia (RBA) announced a rate increase earlier today. As a result, Governor Philip Lowe of the RBA raised the OCR by 50 basis points (bps). Following the announcement of the rate rise, the RBA’s OCR is now at 1.85%.

Board expects to take further steps in the process of normalizing monetary conditions over the months ahead. However, the central bank is not on the pre-set path in normalizing rates.

The bank’s central forecast is for cpi inflation to be around 7¾ percent over 2022, a little above 4% over 2023, and approximately 3% over 2024. (the inflation rate for the second quarter of CY2022 was published last week by the Australian Bureau of Statistics to be 6.1%, 100 basis points higher than the first quarter’s reading.)

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The bank’s central forecast is for GDP growth of 3¼ percent over 2022 and 1¾ percent in the following two years.

The Australian dollar dumped sharply after the decision, losing circa 100 pips (or 1.5%) against the US dollar.

Tensions between US and China over Pelosi’s trip

Elsewhere, China’s General Administration of Customs abruptly barred the import of more than 100 food goods from Taiwan before US House Speaker Nancy Pelosi’s trip to Taiwan, according to Chinese media reports. This may do significant harm to the nation’s food sector, agriculture, and fisheries.

China’s action is interpreted as revenge for Pelosi’s trip to Taiwan.

Meanwhile, according to Taiwan’s Defense Ministry, the military has a “full grip” of actions nearby Taiwan and would send out soldiers in response to enemy threats if necessary.

“We have determination, capacity, and confidence to safeguard national security,” they said in a warning.

Investors will continue monitoring political events since JOLTS Job Openings will be the lone data item on the US economic docket. Later in the day, both Chicago Fed President Charles Evans and St. Louis Fed President James Bullard will give speeches.

It looks like the falling wedge pattern, which sent the Aussie sharply higher, has “morphed” into a rising wedge pattern, possibly sending the Aussie back to the 0.67 – 0.68 area. Considering the recent market risk-off sentiment, the AUD could stay under pressure.

AUD/USD daily chart, Source: Author´s analysis, tradingview.com

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