Reserve Bank of Australia Preview: No choice but to keep hiking rates

• The Reserve Bank of Australia could surprise financial markets with a 50 bps hike.
• Australian inflation has continued to rise by the end of 2022, hinting at more rate hikes.
• AUD/USD is poised to challenge a strong static support area at around 0.6850.

The Reserve Bank of Australia (RBA) will announce its monetary policy decision on February 7, with the Board expected to pull the trigger by another 25 basis points (bps). The RBA has been among the first to reduce the pace of tightening, opting for 25 bps hikes in October.

Financial markets anticipate a fourth rate increase of the same extent, although some analysts foresee increased chances of even larger rate hikes. The reasoning behind such speculation is overheating inflation. The headline Consumer Price Index (CPI) rose at an annualized pace of 7.8% in the final quarter of 2022, up from 7.3% in the previous quarter. Furthermore, another inflation estimate, the monthly CPI indicator, rose 8.4% in the twelve months to December, with the most significant price increases in Housing, Food and Non-Alcoholic Beverages, and Recreation and Culture, according to the official report.

Meanwhile, the Australian economy grew by 0.6% in the third quarter of 2022 after expanding by 0.9% in the previous quarter. The RBA was expecting the economy to grow at an annualized pace of 3% in 2022, as per its November Economic Outlook. The country is yet to report the Q4 2022 pace of economic growth, but it seems unlikely the country will reach such a figure.

For the time being, market participants anticipate at least three more rate hikes from the current 3.1% of at least 25 bps each before analysing a potential pause in  April.

AUD/USD possible scenarios

Chances of a 50 bps hike are limited, but if that’s the case, the AUD/USD pair will likely recover some of the ground lost these days to substantial US Dollar demand. The pair currently trades below 0.6900 and may recover initially towards its intraday high at 0.6950. Further gains could see a test of the 0.7000 threshold, although selling interest around the latter should reject advances, particularly considering the broad demand for the US Dollar.

A 25 bps is mostly priced in by market players, which means the focus will shift on whatever Governor Philip Lowe and co hint for the near future. If policymakers somehow diminish the chances of at least two more rate hikes, the market will read it as dovish, resulting in AUD/USD extending its slide. A strong static support area comes in at 0.6850, where the pair has multiple weekly lows and tops since April 2022. A break below the level should lead to a steeper decline towards the next psychological figure at 0.6800.