The Australian dollar has posted losses over three straight days and is sharply lower on Monday. In the North American session, AUD/USD is trading at 0.6610, down 0.96%.

RBA shifts gears

The Reserve Bank of Australia has changed course and eased up the pace of hikes, but with inflation still accelerating, is it too soon? After a string of 50-bp increases, the RBA has slowed down and delivered two straight hikes of 25 bp. The RBA was the first major central bank to make the shift, and the Federal Reserve is widely expected to ease to a 50-bp increase at the December meeting.

The thinking behind smaller rate hikes is it will cause less of a shock to the economy and ease the pain that households and businesses are going through as rates go up and up. At the same time, the RBA has circled inflation as public enemy number one, and it will have to keep hiking until it detects a peak in inflation. The RBA may be easing up on the pace of rates, but Governor Lowe is using the jawbone tactic to dampen any expectations that the central bank is winding up its tightening.

To this end, Lowe has warned that the bank would not hesitate to return to oversize rate hikes if needed. The RBA is keeping a close eye on wage growth, which jumped to a nine-year high in Q3, gaining 3.1%. The RBA is wary of the spectre of a wage-price spiral if wages continue to accelerate, which would greatly complicate its efforts to curb inflation.

The steady stream of hawkish statements from Fed members has chilled risk appetite and dashed hopes of a Fed U-turn on rate policy. The US dollar has bounced back after taking a beating following the inflation report earlier this month. The Fed has long insisted that one or two reports showing weaker inflation does not make a trend, although risk sentiment has nonetheless when inflation drops. If November’s inflation data is lower than anticipated, we can expect risk appetite to rise again, at the expense of the US dollar. The markets have priced in a 50-bp hike next month, although some Fed members have stated that a 75-bp move remains on the table.

AUD/USD technical

  • AUD/USD is testing support at 0.6609. Below, there is support at 0.6541.

  • There is resistance at 0.6704 and 0.6772.

AUDUSD

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