Briefly –
- Analysts predict another rate increase from the Reserve Bank of Australia on Tuesday.
- AUD/USD hovers with a massive tone.
- Interest rate differential remains crucial.
This month remains crucial as far as the economy is concerned. For instance, financial policy by central banks will rule financial markets. One is from the RBA (Reserve Bank of Australia), expected on 5 July (Tuesday).
The Reserve Bank of Australia was among the first banks to increase interest rates amid the soaring inflation. However, it’s doing that at a rate that exceeds interest rate hikes in the US.
That had analysts predicting a cash rate target of 0.85% in the coming decision. Meanwhile, market players anticipate either a 50 basis point or a 25 basis point rate increase. However, the bias remains that the bank would adopt a more aggressive move, moving the cash rate target by 50 basis point up to 1.35%.
Australian Inflation Higher Than RBA’s Target
RBA suggests an appropriate target for fiscal policy is to attain an inflation rate of 2% – 3% over time. Such a rate would offer the central bank a space to respond to any economic downturn and propel stable economic growth amidst expansionary periods. However, current Australian inflation exceeds 5%.
Though not higher than the Euro region (8.6%) or the US (8.5%), Australian inflation remains well beyond the RBA’s target. Therefore, the central bank responded by hiking interest rates. Moreover, it will maintain such stances until inflation eases.
AUD Still Weak Against USD
Interest rate differential remains the primary drive in exchange rate fluctuations. The exchange rate shows the worth of one currency against the other, and one can ensure informed projection about investor preferences by comparing the interest rates of two currencies.
That explains why the AUD-USD exchange rate plunged in 2022. Though the Reserve Bank of India hiked rates, the Federal did more. Even a 50 bp cash rate increase by the RBA (tomorrow) would have Australia’s cash rate beneath the Fed’s 1.5%.
Furthermore, the market anticipates another 75 basis point Fed hike in July. Therefore, with the rate differential projected to widen, the AUD-USD exchange rate would see persisting pressure. Meanwhile, the technical standpoint shows the AUD-USD trading beneath the 0.70-pivot. While beneath, any rebound will likely encounter heightened selling.
Other AUD pairs might seem lucrative to investors from a rate differential view. For example, EUR-AUD might surrender its latest strength as the Euro-Australia demand widens.
Nevertheless, the Reserve Bank of Australia will lead the financial policy decisions announcement in July. Before responding to RBA’s moves, investors should contemplate what other leading central banks could do in July. Precisely, ECB and Fed will matter (in July) more than RBA’s Tuesday decision.