AUD/USD: Expectations of RBA Rate Hike Strengthen the Australian Dollar

Ben Graham · January 29

At the time of writing on Thursday, the AUD/USD pair continues to trade higher, bolstered by renewed optimism about Australian monetary policy.

The pair is supported by fresh inflation data that exceeded forecasts, reinforcing the positions of those advocating for a prompt tightening of the RBA's monetary policy. According to the RBA Rate Tracker tool on the Australian Securities Exchange (ASX), the probability of a 25 basis point rate increase at the upcoming meeting now exceeds 70%, reflecting a sharp shift in market expectations. This change in the rate outlook enhances the Australian dollar's attractiveness against other major currencies.

The reports indicate an acceleration in both headline and core inflation, highlighting the resilience of price pressures. This presents the Australian central bank with a challenging task of controlling inflation, which is still significantly above the target, while maintaining the momentum of economic activity and domestic demand. Furthermore, the rise in export and import prices over the quarter confirms that inflationary pressures extend beyond cyclical factors.

On the USD side, the potential for the AUD/USD pair to rise is constrained by Treasury Secretary Scott Besant's reaffirmation of Washington's commitment to a strong US dollar, and the Fed's decision to keep rates unchanged at its recent meeting. Fed Chairman Jerome Powell emphasized the dependency on incoming data amid sustained growth and high inflation. As a result, the dynamics of AUD/USD primarily depend on corrections in assessments of Australian monetary policy; as long as markets perceive a high likelihood of action from the RBA, the Australian dollar should maintain a positive tone despite ongoing uncertainty about the Fed's rate trajectory.

From a technical perspective, oscillators on the daily chart are in the overbought zone, suggesting a correction or consolidation. However, the MACD histogram is increasing in volume, which is preventing the pair from entering a consolidation. The pair's path of least resistance is upward.

Below is a table showing the changes in the Australian dollar against key currencies for the day. The Australian dollar has strengthened against the British pound.