AUD/USD Falls by More Than 150 Pips Facing the Brunt of Dovish RBA and Hawkish Powell Testimony – Quadcode Markets Research

Australian Dollar Plummets After Powell’s Testimony

On Tuesday 7th March, Reserve Bank of Australia raised its benchmark interest rate by 25 basis points to 3.6%. This marked the 10th consecutive interest rate hike and the highest levels since 2012.

However, despite mentions for further hikes by the RBA, the Australian dollar dramatically weakened following the announcement as the message was not perceived as hawkish enough by the markets to justify increased investment in Aussie while RBA Governor Lowe stated that inflation might have peaked.

As that was not enough for the pair, Powell’s testimony hours later caused increased demand for the US dollar after, the Fed Governor stated that “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes”. Moreover, the Fed Governor emphasized that rates are ‘likely to be higher’ than previously anticipated.

As can be seen in the below chart from the Quadcode Markets trading platform, the Australian dollar weakened versus the US dollar significantly after both events and collapsed by more than 160 pips from high to low within the day.

Navigating the Tightrope: Balancing Inflation, Unemployment, and GDP Growth in the Australian Economy

The Australian economy has been experiencing rising inflation in recent quarters together with rising unemployment and slower GDP growth. Inflation hit 7.8% in Q4 2022, while GDP grew by 2.7% in the same period versus 5.9% in the previous quarter. At the same time unemployment rose from a low of 3.4% in October 2022 to 3.7% in January 2023.

The RBA is walking on a tightrope putting the economy into a high risk of contraction in its fight against rising inflation. That’s perhaps one of the reasons the message was about future rate hikes to be data dependent portraying a more cautious approach by the Bank, in addition to the expectations that the worst regarding inflation might be over.

US Economy Remains In Good Shape

On the other hand, the US economy has been in better shape with inflation softening from a peak of 9.1 in June 2022 to 6.4% in January 2023. At the same time, unemployment fell from 3.7% in October 2022 to 3.4% in January 2023, white GDP grew by 2.7% in Q4 versus 3.2% in the previous quarter.

All in all, the US economy appears to be withstanding the Fed’s tightening monetary policy measures, leaving more leeway to the Fed to take a harder stance versus the RBA. And this can partly be the reason behind Powell’s more hawkish than expected remarks versus Lowe’s more dovish than expected remarks.

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