AUDUSD Surges Amid USD Weakness, Hawkish RBA Minutes
18 October 2022
The Australian dollar traded half a percent stronger on Tuesday, flying with the rest of the risk assets as the overly pessimistic mood and oversold conditions in the markets could prompt a stellar short-squeeze rally.
RBA Minutes sounded hawkish
The Reserve Bank of Australia's (RBA) Board considered a number of justifications for raising the cash rate by 50 basis points, as it had done for four months in a row, but ultimately chose to raise it by 25 basis points to 2.6%, according to minutes of the Oct. 4 policy meeting released on Tuesday.
The RBA Board highlighted that since May, rates had already increased by 250 basis points, and the majority of those increases had not yet been reflected in mortgage payments. In addition to affecting personal wealth and housing values, the tightening might eventually slow down spending.
However, the Board emphasized that Australia's inflation rate of 6.1% was too high and that it was anticipated to reach 7.75% by year's end, with rents and utilities contributing to the pressure on prices. The Board was committed to getting inflation back to its goal range of 2-3% and understood that doing so required maintaining inflation expectations firmly in place.
On the other hand, investors appear to be confident that the Federal Reserve will keep tightening monetary policy at a quicker rate in order to control inflation. A further supersized 75 bps Fed rate rise in November has a nearly 100% probability, according to the current market pricing. The US bond rates and the dollar, in turn, should continue to benefit from this.
It looks like a nice falling wedge pattern on the daily chart, a bullish reversal formation. If the Aussie closes above 0.6340, the pattern could be confirmed, implying further gains toward 0.66 in the initial reaction.
Alternatively, the support is seen near 0.65, and the price must stay above it to defend the bullish momentum.
There is also a bullish divergence between the price and the RSI indicator, confirming the current upward bias.