- AUD/USD spikes to its highest level since mid-May in reaction to the RBA’s surprise 25 bps lift-off.
- The cautious market mood revives the USD demand and caps gains for the risk-sensitive Aussie.
- The fundamental backdrop favours bullish traders and supports prospects for additional gains.
The AUD/USD pair gains strong positive traction for the fourth successive day on Tuesday and jump to its highest level since mid-May. Spot prices, however, trim a part of intraday gains and trade around mid-0.6600s, still up nearly 0.50% for the day heading into the North American session.
The Australian Dollar (AUD) strengthens across the board in reaction to the Reserve Bank of Australia's (RBA) surprise 25 bps rate-hike and provides a goodish lift to the AUD/USD pair. The unexpected lift-off for the second straight month pushes the benchmark interest rates above 4% for the first time in nearly 12 years. Moreover, RBA Governor Philip Lowe acknowledged that inflation is still too high and that high prices would cause more economic damage than a near-term rise in interest rates.
Adding to this, the central bank maintains a hawkish bias and said that some further tightening of monetary policy may be required to bring inflation back to its target range within a reasonable timeframe, which further underpins the Aussie. That said, the prevalent cautious mood around the equity markets helps revive demand for the safe-haven US Dollar (USD), which holds back bullish traders from placing fresh bets around the AUD/USD pair and caps any further upside, at least for the time being.
Any meaningful upside for the USD, however, seems limited amid expectations for an imminent pause in the Federal Reserve's (Fed) policy tightening cycle. In fact, the current market pricing indicates a greater chance that the US central bank will leave interest rates unchanged at its upcoming monetary policy meeting on June 13-14. This leads to a further decline in the US Treasury bond yields, which, in turn, should act as a headwind for the Greenback and supports prospects for a further appreciating move for the AUD/USD pair.
The aforementioned fundamental backdrop suggests that the path of least resistance for spot prices is to the upside and any meaningful pullback might still be seen as a buying opportunity. There isn't any relevant market-moving economic data due for release from the US on Tuesday. Hence, market participants now look forward to RBA Governor Philip Lowe's speech and the release of the first quarter GDP report from Australia for some meaningful impetus during the Asian session on Wednesday.
Technical levels to watch
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