The AUD/USD currency pair is showing a fighting spirit today: the Aussie tested the resistance level of 0.6710, reacting to the results of the Reserve Bank of Australia's May meeting. Contrary to the dovish forecasts of most experts, the regulator unexpectedly raised the interest rate by 25 basis points. In response, the AUD/USD pair jumped almost a hundred points within a few hours. The Aussie received unexpected support from the RBA.
RBA decision: a surprise, but not a sensation
It cannot be said that today's decision by the Australian regulator is a bolt from the blue. The head of the RBA had hinted at a hawkish character during the April meeting. The Central Bank members paused the rate hike at that time but simultaneously allowed the possibility of hitting the gas again. Commenting on the results of the April meeting, Philip Lowe emphasized that the RBA had paused the rate hike process, not ended the current tightening cycle. In the accompanying statement, the Central Bank also specifically stated that "some tightening of monetary policy" may be needed in the future, as the Board still intends to return inflation to the target level "and will do everything necessary to achieve this goal."
Nevertheless, despite such verbal signals, the market was mostly confident that the Australian regulator would take a wait-and-see stance at the May meeting. For example, according to the results of a survey conducted by Reuters, more than 75% of the surveyed economists (26 out of 34) stated that the RBA would keep the rate at the same level in May. Only eight respondents predicted a 25 basis point rate hike. Currency strategists of major local banks (NAB, Westpac, ANZ) also stated the likelihood of maintaining the status quo (although CBA analysts predicted a 25-point rate hike). Interest rate futures assumed the rate would remain at the current level.
The fact is that the latest inflation release favored a wait-and-see stance rather than the opposite. The Consumer Price Index decreased in annual, quarterly, and monthly terms, reflecting a slowdown in inflation. However, the slowdown rates left something to be desired – the CPI in annual and quarterly terms was in the "green zone" since most analysts expected a more significant decrease in indicators. For RBA members, this was enough to lift their foot off the brake pedal and press the accelerator again.
The Show Must Go On?
In the accompanying statement of the May meeting, the regulator indicated that the Board members are still determined to return inflation to the target level, while inflation at 7% is "still too high." At the same time, the Central Bank did not rule out further steps towards raising the rate – the final communique states that further tightening "will depend on how the economy and inflation develop." In this context, the RBA noted that the prospects for household consumption remain a significant source of uncertainty.
The results of the May meeting undoubtedly surprised market participants. Since May 2022, this has already been the eleventh increase in the cost of borrowing: the rate has been raised by a total of 375 basis points. The regulator not only raised the rate, contrary to experts' opposite forecasts, but also did not rule out further steps in this direction.
In fact, the RBA has tied the fate of the interest rate to inflation: if the next inflation release in Australia is again in the green zone, the likelihood of another round of rate hikes will significantly increase.
Conclusions
The Reserve Bank of Australia has become an ally of the Aussie: following the results of the May meeting, the AUD/USD pair jumped almost 100 points, testing the resistance level of 0.6710 (the lower border of the Kumo cloud on the D1 timeframe). However, it should be noted that buyers of the pair were unable to impulsively overcome this price barrier. The price got stuck at the border of 66 and 67 figures. This speaks to the unreliability of longs. Initial emotions gradually fade away, traders have played the "hawkish surprise" from the RBA, but they do not risk going further. This is explained by the fact that the Fed will deliver its verdict tomorrow. Therefore, it is advisable to open long positions on the pair only after traders confidently consolidate above the target of 0.6710. In this case, the next upward target will be the 0.6790 mark (the upper line of the Bollinger Bands indicator on the daily chart).
But I repeat—on the eve of the May meeting of the Fed, it is most advisable to take a wait-and-see position on the pair, as the American regulator can also present a "hawkish surprise" amid the growth of the core consumer price index in the U.S. and the core GDP price deflator.