Will the RBA Hike? If So, AUD/USD Still Faces Roadblocks

Australian Dollar Fundamental Forecast: Neutral

  • Australian Dollar still disappoints against US Dollar despite hot CPI
  • A hawkish Reserve Bank of Australia could offer AUD/USD a nice push
  • However, Fed 50-basis point hike may sour sentiment, denting Aussie

The Australian Dollar wrapped up its worst month against the US Dollar since November 2021, having just seen strong performance in February and March. Traders looking to capitalize on the hotter-than-expected Australian first-quarter CPI print were likely disappointed. The trimmed mean reading, which helps smoothen out volatility, surpassed the central bank’s target.

A couple of reasons may explain why AUD/USD was aiming lower in recent days and weeks, opening the door to further downside momentum. On the chart below, AUD/USD can be seen falling despite the fading advantage US front-end Treasury yields have over their Australian counterparts. For the most part, rising interest rate hike expectations should help increase a currency’s value in the foreign exchange market.

This is where things start to get tricky. The Australian Dollar also takes on a sentiment-linked role in financial markets. This means AUD can at times follow what global risk appetite is shaping up to be. With that in mind, it seems that the Aussie has lately been focusing more on the decline in the S&P 500 since it topped in April. When risk appetite is fading, that is also when the haven-linked US Dollar can shine.

This coming week, could the Reserve Bank of Australia offer some juice for the Aussie? The hot Australian inflation print further bolstered hawkish monetary policy expectations. The markets are pricing in, with about 60%+ certainty looking at cash rate futures on Bloomberg, that the RBA could lift rates to 0.25% from the current 0.10% on Tuesday. By the end of this year, about 10 hikes in total are priced in.

As mentioned earlier, a fragile sentiment environment could easily evaporate gains that AUD/USD could see on the RBA. The Federal Reserve is also expected to hike, delivering 50-basis points and to soon start shrinking its USD 9 trillion balance sheet. Therefore, traders out to treat gains in Aussie with a pinch of salt. The risk of further disappointment in sentiment thus keeps the Aussie fundamental outlook neutral.

Australian Dollar Versus AU-US Bond Yield Spreads and S&P 500 Futures

Chart Created Using TradingView

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter