Reserve Bank of Australia Hikes Interest Rate, Vows to Double Down on Fight with Inflation


The 10-year Treasury yield has finally reached an important 3% milestone, however, slipped below the level on lack of bearish consensus, greenback index stabilized at 103.50, the S&P 500 fell below 4100 on Monday, however, there lack of persistence from the sellers helped the index to close in green above the 4100 level. It seems that the dollar finds itself relatively comfortable near multi-year highs as investors expect that the previously outlined path of the Fed tightening and its hawkish dot plot, despite stagflation in Europe and slowdown in the Chinese economy, will remain in place. The RBA hiked interest rate by 25 bp in light of heightening inflationary expectations in the country, signaling that it will do more to contain inflation pressures.While asset prices have already penciled in the Fed’s fairly aggressive pace of tightening, increasing the risk of major disappointment in case of potential dovish tweak of the Fed at the upcoming meeting, lack of appeal of overseas markets relative to the US is currently providing strong support for the dollar, so a dovish impact from the Fed meeting may prove to be short-lived.The RBA beat expectations delivering 25bp rate hike against the forecast of 15 bp and also announced that it would not reinvest income from maturing bonds into buying new ones, thus effectively putting an end to the QE program. AUDUSD rebounded on the decision which, nevertheless, could present an opportunity to short the pair as the bearish trend remained largely intact. Short-term outlook for risk assets, and therefore currencies correlated with risk demand, remains unfavorable due to numerous signs of a slack of the key economies such as China or EU, which also speaks more weakness for AUD. AUDUSD buyers are expected to provide significant resistance around the January low of 0.6970-0.70:An important proxy for expectations for the pair is now the covid crisis in China, and judging by the dynamics of the incidence and the tightening of the fight against the epidemic, positive changes will not come soon, which means that the forecast for AUDUSD, in terms of the impact of this factor, remains negative.EURUSD continues to fight for 1.05, the price is stabilizing near the level, as the market is waiting for more certainty on the Fed’s monetary path, which should appear at tomorrow’s meeting. The pair may also be pressured by news related to the new package of EU sanctions against Russia, as well as the embargo on oil or gas, as this will directly affect inflation expectations and its negative effects on the European economy. Nevertheless, the EURUSD rate, having fallen to a multi-year low, already priced in enough negativity and risks, so the bar for disappointment seems very high. On the other hand, more verbal intervention by the ECB, in particular from less hawkish members of the Governing Council, could allow the pair to rebound with confidence. A potential breakout of the pair below EURUSD is likely to be accompanied by strong momentum, and it is this nature of the price movement that can become a reliable signal that the pair is primed for a reversal.The pound sterling, in turn, is waiting for the decision of the Bank of England this Thursday. Stagflation risks have already forced the BoE to soften its rhetoric in March, and investors expect further easing at the upcoming meeting, despite the consensus that the BoE will raise rates by 25bp. The latest data from UK retail sales showed that consumption began to decline in March in response to the significant increase in consumer prices and the risks that policy tightening will burden the economy are growing. The Central Bank understands this very well. The fall of the GBPUSD below the short-term and long-term bearish trend lines suggests that in the event of a movement below 1.25, the pair will most likely look for support at the lows of May and June 2020 (area of 1.21-1.23):

Source: Tickmill

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