AUD/USD and NZD/USD Fundamental Daily Forecast – RBA Raises Benchmark 25-Basis Points as Expected

The Reserve Bank of Australia (RBA) increased its official cash rate target by 25 basis points on Tuesday. The rate hike was a record seventh straight in as many months. Its benchmark rate is now at 2.85%.

Economists had mostly expected a quarter-point increase after the September quarter consumer price index (CPI) rose more than expected to 7.3%, a 32-year high.

The Australian Dollar was trading at its intraday high at .6447 at the time of the release. It has since backed down.

At 03:42 GMT, the AUD/USD is trading .6418, up 0.0020 or +0.31%. On Monday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $63.33, down $0.19 or -0.30%.

Lowe Sees Inflation Peaking at Around Eight Percent

After the release of the interest rate hike, RBA Governor Philip Lowe divulged that policymakers now expected inflation to peak about 8 percent, above the 7.75 percent tipped in last week’s budget, and more interest rates hikes would be needed to corral inflation.

“As is the case in most countries, inflation in Australia is too high,” Dr. Lowe said in his post-meeting statement, adding while global factors explained most of the increase, strong domestic demand was also a factor.

“The board expects to increase interest rates further over the period ahead. It is closely monitoring the global economy, household spending and wage and price-setting behavior,” he said.

“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

Inflation to Remain High

In addition to expecting annual headline inflation to peak at around 8 percent, the RBA think inflation will stay above the bank’s 2 percent to 3 percent target band until at least 2025.

“Price stability is a prerequisite for a strong economy and a sustained period of full employment. Given this, the Board’s priority is to return inflation to the 2-3 percent range over time,” Dr. Lowe said.

“It is seeking to do this while keeping the economy on an even keel. The path to achieving this balance remains a narrow one, and it is clouded in uncertainty.”

Longer-Term Rate Outlook

After the rate hike was announced, the financial markets priced in a cash rate peak of almost 4 percent by July next year, while leading economists think 3.85 percent is in the cards.

Daily Forecast

It difficult to read into the price action by the AUD/USD just two days ahead of the Fed’s widely expected 75-basis point rate hike on Wednesday. However, it could be suggesting that traders are anticipating the Federal Reserve to announce a slowdown in the pace of future rate hikes.

Whether the Fed announces a dovish pivot or sticks with its hawkish tightening cycle will determine the near-term direction of the AUD/USD after Wednesday.