AUD Surprise Rate Hike

• Reserve Bank of Australia made a surprise rate hike in its last meeting on Tuesday by 25bp. 

• The Federal Reserve may follow suit in its meeting next week as it faces the same situation with inflation. 

• Given Australia is a major commodity exporter, it may put a strain on exports going forward by having a stronger currency. 

The Reserve Bank of Australia surprised everyone by increasing its cash rate by 25bps to 4.1% while also signaling that many more rate hikes could come soon in order to tame inflation. Over the past year, the RBA has increased rates by 400bps due to persistent inflation in services and wage growth. Members of the RBA signaled that a soft landing is going to be a big challenge in trying to get inflation back down to its the 2-3% target.

Technically speaking, the Aussie did rally post the hike in the cash rate, but slower GDP data caused the Aussie to take a breather. There are low volume nodes and fair value gaps between [0.66350-0.66470] and [0.65560-0.56700] on the hourly chart that have a high probability of getting filled. Moreover, on the daily chart, the price action did rise to meet the 200-period SMA and the volume point of control, but pulled back thereafter. If the price action continues to remain below the 200-period SMA and the volume point of control on the daily chart, the head and shoulders pattern to the downside remains in-tact, and the bias remains to the downside. 

Hourly Chart

Daily Chart