With inflation in Australia shooting to a 33-year high in Q4, most market participants are convinced that the RBA will continue raising interest rates. The Bank meets on Tuesday at 03:30 GMT, with investors eager to see whether another quarter-point hike will be delivered, but also what policymakers are planning thereafter. Will the RBA sound hawkish enough to add extra fuel to the aussie’s tanks?

What happened in December

At its last meeting for 2022, the RBA decided to raise its cash rate target by 25bps to 3.10%. This was the third consecutive quarter-point increment since officials decided to slow down from 50bps hikes.

In the accompanying statement, officials noted that inflation remains high and that the economy continues to grow solidly, although growth is expected to moderate over the year ahead as the global economy slows. They acknowledged that monetary policy operates with a lag and that the full effect of past rate increases is yet to be felt in mortgage payments, but they also signaled that they anticipate more rate raises over the period ahead. However, they added that they are not on a pre-set course, rather that they will assess the outlook and take decisions on a meeting-by-meeting basis.

What is the data saying?

After the gathering there have been some expectations that the RBA might decide to pause this tightening cycle, but incoming data since then has changed investors’ minds. Yes, the employment report revealed that the economy lost 14.6k jobs in December, but this was after seeing gains of 101.3k in October and November together. The unemployment ticked up, but from the lowest rate since 1974. Most importantly, headline inflation jumped to a 33-year high of 7.8% y/y during the last quarter of 2022, with all underlying metrics accelerating more than expected as well.

Now investors are assigning an 88% chance for another 25bps, with the remaining 12% pointing to now action. They also see a further 25bps worth of rate increases before the Bank presses the stop button.

How may the aussie respond?

So, all this suggests that another 25bps hike by itself is unlikely to trigger volatility in the aussie, as it is the market’s base case scenario. Therefore, if indeed this is the size of the delivered hike, market participants may quickly turn their attention to the accompanying statement. February is a month when the Bank releases its quarterly Statement on Monetary Policy the Friday following the policy decision. Therefore, the statement will include a first glimpse on policymakers’ updated economic projections.

Elevated inflationary pressures and a tight labor market may allow policymakers to maintain the view that further hikes may be needed, which may prove supportive for the Australian dollar. Even if the RBA sounds more cautious than expected, especially after it said to a government hearing on Wednesday that inflation has already peaked in Australia, any pullback in the aussie may just prove to be a corrective retreat that provides renewed buying opportunities.

After all, due to its risk-linked characteristics, the Australian currency has been performing very well this year, despite the RBA raising interest rates at a slower pace than most of the other major central banks. The reopening of China, the world’s second largest economy and Australia’s main trading partner, combined with increasing expectations of a pivot by the Fed later this year are a blend of developments that investors continue to cheer.

What about the technical outlook?

From a technical standpoint, aussie/dollar pulled back on Thursday, after it failed to break above the key resistance zone of 0.7135, marked by the high of August 12. Should that happen at some point soon, the pair would confirm a higher high on the daily chart, and signal the continuation of the prevailing uptrend, marked by the uptrend line drawn from the low of October 13. The bulls could then climb to the 0.7285 zone, defined as resistance by the high of June 3, the break of which could carry extensions towards the peak of April 21, at around 0.7460.

For the outlook to turn bearish, a break below the key support area of 0.6890 may be needed. Such a dip could confirm the violation of the aforementioned uptrend line, and may set the stage for declines towards the key area between 0.6550 and 0.6630. If there are no buyers to be found there either, a break lower may then set the stage for extension towards the low of November 10 at 0.6380.