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AUD/USD and NZD/USD Fundamental Daily Forecast – RBA to Raise Rates, Announce Faster Pace of Future Hikes

The Australian Dollar is inching higher in a tentative trade early Tuesday, shortly ahead of the Reserve Bank of Australia’s (RBA) interest rate and monetary policy decisions.

Also underpinning the Australian and New Zealand Dollars is chatter that the United States might soon relax tariffs on goods imported from China.

At 03:43 GMT, the AUD/USD is trading .6878, up 0.0023 or +0.18% and the NZD/USD is at .6213, up 0.0004 or +0.06%. Last Friday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $67.49, down $0.83 or -1.21%.

RBA to Hike Rates by Another 50 Basis Points

Australia’s central bank will deliver another half percentage-point interest rate hike on Tuesday as it fights to tame surging inflation, marking the first time it has ever raised the cash rate by that magnitude at consecutive meetings, a Reuters poll found.

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With inflation already at a 20-year peak of 5.1% in the first quarter and expected to approach 7% by the end of 2022, markets are wagering the RBA will have to raise rates faster, to near 3% by the end of the year.

All but one of 33 economists in the June 27-30 Reuters poll forecast the RBA would hike the cash rate by 50 basis points again at its July 5 meeting, taking rates to 1.35%. One economist expected a 25 basis-point hike.

RBA Playing ‘Catchup’

The RBA has never raised its cash rate by half a percentage point at two consecutive meetings since it was introduced in 1990, according to Reuters.

“The Reserve Bank looks to be playing catchup with accelerating inflation. The challenge for the RBA is to minimize the spillover into broader inflationary pressures. It seems awake to this challenge,” noted Felicity Emmett, senior economist at ANZ.

All four major local banks – ANZ, Westpac, CBA and NAB – were expecting a 50 basis point hike on July 5.

Short-Term Outlook

Like the other major central banks, the RBA knows it only has a small window of time to suppress inflation. The RBA’s Philip Lowe has said policymakers will do “What’s necessary to get inflation back to 2-3%”.

We’re looking for the RBA to reiterate this stance in its monetary policy statement while raising rates 50 basis points.

If the RBA comes through as expected, the AUD/USD could jump higher on the initial news. However, since the Fed is well ahead of the Australian central bank and likely to raise its benchmark 75 basis points on July 27, gains are likely to be capped and the selling pressure is likely to resume over the near-term.

Furthermore, lower demand for riskier assets is also threatening to drive the Australian and New Zealand Dollars lower. Fear of a global recession due to rising rates is the catalyst behind the current “risk-off” tone.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire

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