Reserve Bank of Australia Preview: Rate hikes are here to stay

• Inflation in Australia doubles wage growth, according to Q1 figures.
• The RBA could pull the trigger by 40 bps, as discussed in the May meeting.
• AUD/USD bearish potential seems limited as long as the pair stays above 0.7140.

The Reserve Bank of Australia is having a monetary policy meeting on Tuesday, June 7, and is expected to hike the cash rate for a second consecutive month. In May, the central bank decided to lift the main benchmark by 0.25%, the first move in over ten years.

Inflation doubles wage growth

Market participants are split on whether the central bank will pull the trigger by another 25 bps or if it will go with a 40 bps upswing. In the May statement, policymakers argued that the best decision would be the latter, with a quarter-point hike priced in at the time being. Either way, the RBA is signaling it is ready to act decisively on taming inflation.

Annual inflation in Australia hit 5.1% in the first quarter of the year, after posting 3.4% in the last quarter of 2021. The figure was well above the market’s expectations, one of the reasons the RBA acted swiftly. In the May statement, policymakers anticipated the Consumer Price Index could hit 6% by year-end before easing to 3% by mid-2024.

Over the same period, wage growth was up 2.4%, less than half the inflation surge, although slowly improving from the pandemic-related collapse and the highest reading since Q4 2008. Nevertheless, the disconnection between wage growth and inflation has become a burden not only for households but also for the central bank, which juggles between dowsing inflation without provoking an economic setback.

AUD/USD possible scenarios

As said, a 25 bps hike has been already priced in. If somehow the RBA decided to slow down and go for 0.10% or 0.15%, AUD/USD could come under selling pressure, although if the current market’s optimism persists, the slide should be limited. On the other hand, a 40 bps hike plus hints on more interest rate raises coming would result in the AUD/USD pair surging to fresh monthly highs.

From a technical point of view, AUD/USD is battling to overcome the 50% retracement of its latest daily slide at 0.7245, measured between 0.7660 and 0.6828. The daily chart shows that technical indicators are correcting overbought conditions, although the RSI has stabilized well above its midlines. At the same time, the pair is hovering around a flat 100 SMA, while a bullish 20 SMA heads firmly north far below the current level.

Overall, the downside seems limited. An immediate support level is 0.7140, the 38.2% retracement of the aforementioned decline. A break below the latter could be the beginning of a bearish movement that could extend towards the 0.7000/20 region.

On the other hand, and beyond 0.7245, the pair will likely meet resistance in the 0.7260 price zone, where it topped last week. Gains beyond the area will anticipate another leg north for the upcoming sessions.