AUD/USD retests day’s high near 0.6730 as RBA hikes interest rate by 25 bps

The AUD/USD pair has tested its day’s high at 0.6730 as the Reserve Bank of Australia (RBA) has hiked its Official Cash Rate (OCR) by 25 basis points (bps). This is the third consecutive 25 bps rate hike by RBA Governor Philip Lowe, which has pushed its OCR to 3.10%. The decision has remained in line with the expectations.

Economists at UOB Group cited that “We are penciling in another 25 basis points (bps) hike at the final monetary policy meeting of the year on 6 Dec, which will take the OCR to 3.10%. This would be the third consecutive 25 bps rate hike by the RBA.

The market participants were expecting a continuation of the 25 bps rate hike spell despite a decline in the Australian Consumer Price Index (CPI) in October. The October CPI report showed a decline in the inflation rate to 6.9% from the prior release of 7.3%. This indicated that tight monetary policy is performing its job but the current inflation rate is quite far from the targeted rate of 2%, therefore continuation of the interest rate hike is necessary.

Meanwhile, a cautiously optimistic market mood has pushed the risk-perceived assets on the edge. Stellar numbers from US ISM Services PMI released on Monday triggered a sell-off in risk-sensitive assets. Escalating bets for a risk-aversion theme brought a smart recovery in the US Dollar Index (DXY). At the press time, the USD Index is struggling to hold itself above the critical hurdle of 105.20.

A stronger-than-projected US Services PMI refreshed fears of a bigger rate hike by the Federal Reserve (Fed) as robust demand for services could be curtailed by severe policy tightening measures. Fed policymakers promised in prior monetary policy meetings to favor for a slowdown in the interest rate hike pace to safeguard the economy from financial risks. Attainment of price stability at a cost of crashing the economy is not an optimal way.