A surprise rate hike from the RBA boosts the Australian dollar

At a time when inflation is cooling down in Europe and when the Federal Reserve of the United States thinks of pausing the rate hiking cycle, a surprising rate hike in the other part of the world puts things into a new perspective.

Yesterday, the Reserve Bank of Australia (RBA) raised the cash rate by another 0.25% to 4.10%. Nobody expected this hike, particularly because one month earlier, the market participants were left with the feeling that the RBA is at the end of the hiking cycle.

It appears that it is not, and one may raise the question – what if the Fed hikes next week just when the market believes that it won’t?

The recent jobs report from the United States had something for both bulls and bears. On the one hand, the US created far more jobs in May than economists have estimated. On the other hand, the unemployment rate ticked higher.

So it is all about the upcoming inflation data, as the price stability part of the Fed’s mandate weighs. Inflation is due next week, one day before the FOMC Meeting, so markets are unlikely to move much until then.

But the Australian dollar did move on the news. For instance, the AUD/USD is now two big figures above the recent lows and will likely trade with a bid tone in the days until the Fed releases its decision.

AUD/USD to push against resistance ahead of the Fed

The US dollar was sold aggressively in the last months of 2022. After US stocks bottomed in October, the rally in the stock market was accompanied by a weak dollar.

As such, the AUD/USD exchange rate was the first one to react. Buyers sent the pair from 0.62 to over 0.71 before the rally faded.

The following correction sent the AUD/USD below the 2023 opening levels. At this point, one level seems to be pivotal –0.68. This level offered strong resistance in the past, despite several attempts to overcome it.

But now it may be different.

The RBA rate hike gives the market time to regain the lost ground, given that there is one more week until the Fed releases its statement.

All in all, the hike in Australia puts the Fed’s decision into a new perspective. If the Fed pauses, the AUD/USD exchange rate should fly above the horizontal resistance level of 0.68.