Market alert: The RBA hikes interest rate to seven-year high

[MongiIG]

The RBA announced another 50 bps rate hike to 2.35% on Tuesday and signalled more hikes to come. What can we expect next?

Source: Bloomberg

 

Forex United States dollar AUD/USD Inflation Australian dollar Interest rate

Hebe Chen | Market Analyst, Melbourne | Publication date: Tuesday 06 September 2022 

What is the key takeaway from September's meeting?

• Interest rate: the RBA announced another 50 bps rate hike on Tuesday, raising the rate to 2.35%. The central bank has increased rates by a total of 225 bp since May and the board has signalled it will continue to raise rates over the following months.
• Inflation outlook: The Bank's central forecast is for CPI inflation to be around 7¾ per cent over 2022, a little above four per cent over 2023 and around three percent over 2024. Over time, the Board is “committed” to targeting inflation at the two to three percent range.
• Economic outlook: the RBA highlighted the outlook for global economic growth has deteriorated due to pressures from high inflation, the tightening of monetary policy, Russia's invasion of Ukraine, and the COVID containment and other policy challenges in China. Locally, the Australian economy is anticipated to grow solidly with a boost from a record level of terms of trade and a strong job market.

 

What to expect next?

Considering the recent hawkish stance of the Federal Reserve, compounded with a higher and longer inflation outlook driven by the elevated energy crisis, the RBA is at a crossroads. While the RBA stays firm on the peak-inflation narrative in the September meeting, the upcoming vital economic data like GDP and CPI print may revise RBA’s prediction for the mid-term.

By today, the cash rate futures markets are implying another three hikes for the rest of the three months in 2022. The peak isn't expected to come until July 2023.

Although the RBA may not fall in line with these hawkish expectations, it's more than likely that Mr Lowe will keep the door open to more rate rises for the next six to twelve months.

Source: ASX

AUD/USD technical analysis

The policy is only part of the story for the AUD as the global economic outlook and the two-decade high greenback push the AUD/USD lower.

The AUD/USD fell below 68 cents this week, however, based on the daily chart, it remains firmly entrenched in a primary downtrend while clinging onto technical support around 0.6789. Overall, the momentum appears skewed to the downside for now, especially in light of the newly formed head-shoulder pattern, which often suggests more selling pressures ahead.

If support around 0.6789 breaks, it may open a further drop for the AUD/USD to 0.6758. The next key level of resistance right now can be found around 0.6856.

AUD/USD daily chart

Source: IG