On Tuesday, the RBA surprised the markets after the bank announced a 25-basis point interest rate hike lifting the interest rate to a sizeable 3.85%. The hike sent the AUDUSD over 1.10% higher as the market recalibrated its expectations after the RBA warned further monetary policy tightening might be needed to bring the sticky inflation currently at 7% to its target level of 2-3% within a realistic timeframe.
The Board stated that the labour market remains tight and the service s price inflation is still very high, which were the main drivers of the rate hike, and there remains a need for further tightening. However, the severity of the tightening will be dependent on how the economy and inflation rate respond to the monetary policy. Fed’s interest rate decision bets could provide support for the greenback, with the market mainly expecting a rate hike from the Fed tomorrow. The CME FedWatch Tool is reporting that the market is pricing in a 94.8% probability of a 25-basis point rate hike from the Fed, up from 75.8% a week ago.
Technical
The 4H chart shows that the price action is currently trading within the 61.80% and the 50% Fibonacci retracement levels following the interest rate decision boost in the currency pair’s rally. The bulls could be confident in their short-term rally with the price action above the 50-day moving average. However, the bears could be assured that their time to pull the price lower could be on the horizon with the bulls’ rally accompanied by declining volume.
Nevertheless, should the bull fail to sustainably break above the golden ratio, the bears could look to a breakthrough below the 50% Fibonacci retracement level as a signal of selling momentum. Therefore, a break below the 50% Fibonacci retracement level would bring the 0.66785 and 0.66524 support levels into play. However, failure to sustainably break below 50% Fibonacci retracement level would leave the golden ratio and the 0.67247 resistance level in play.
Summary
The surprise rate hike from the RBA sent shockwaves in the market as the investors recalibrated their position, sending the Aussie higher. However, the slew of economic data from both economies, including the highly anticipated interest rate decision from the Fed due this week, could continue to drive investor sentiment and help limit the currency pair’s upside. Nevertheless, the currency pair could fail to break above the golden ratio but respect the 0.66785 support level as investors braced for the economic data and Fed’s rate decision releases.
Sources: TradingView, Reuters, Trading Economics.
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