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Should you buy or sell the Aussie dollar amid the RBA pivoting?

on Oct 4, 2022
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  • RBA hikes the cash rate by 25bp, but the market participants expected a 50bp rate hike
  • Traders' attention shifts now to other central banks to see if the RBA was only the first one out of many to
  • AUD/USD exchange rate struggles at the neckline of a double bottom pattern, thus having a bullish bias

The first central bank to announce its monetary decision in October was the Reserve Bank of Australia (RBA). Every first Tuesday of each month, except January, the RBA announces its decision, and Aussie traders keep a close eye on what the central bank has to say.

Today’s decision surprised markets.

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For the first time since the central banks began to tighten financial conditions, one major central bank has pivoted. The RBA did hike the cash rate, but only by 25bp on expectations of a 50bp rate hike.

Is this the beginning of major central banks pivoting? Why would they do so when inflation is still above target?

Moreover, as traders, should you buy or sell the Aussie dollar amid the RBA being the first central bank that pivots?

Double bottom pattern hints at more upside for AUD/USD

While the RBA’s decision may have been dovish for the Aussie dollar, traders should remember that the currency market is made of currency pairs. An exchange rate reflects the value of one currency in terms of another.

Therefore, if the RBA has pivoted, many traders out there will bet that the Fed will do the same. Hence, buyers resurfaced after the initial reaction in the AUD/USD exchange rate, and the pair actually made a new high during today’s London session.

AUD/USD chart by TradingView

The technical picture supports the bullish case for the AUD/USD exchange rate. A possible double bottom pattern formed around 0.6400, and now the market struggles at the neckline.

A close above the neckline, seen in orange above, opens the gates for a sustained advance towards the level indicated by the measured move, around 0.6650.

The only way for the AUD/USD to go there in the short term, given the RBA pivot, is that the NFP data in the United States, scheduled on the upcoming Friday, will show a softening labor market.

What did the RBA say?

By raising the cash rate by only 25bp, the RBA signaled that it is not happy with the faster pace of rate increases. Indeed, the cash rate sits at 2.6%, while inflation in Australia is at 6.1%, but the central bank noted that the Outlook for the global economy has deteriorated.

The combination of higher inflation and interest rates pressures households budgets, which is a concern for the RBA.

All in all, today’s decision may be dovish for the Aussie dollar, but the AUD/USD technical picture looks bullish. If this is just the first central bank to pivot, then traders will shift their attention to the Federal Reserve of the United States.