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Australian Dollar Shrugs Off RBA After Breakneck Volatility

Australian Dollar Shrugs Off RBA After Breakneck Volatility

Daniel Dubrovsky, Contributing Senior Strategist


Talking Points:

  • RBA leaves cash target rate unchanged at 1.50% as expected, adds little new to statement
  • The Australian Dollar eventually declined versus its peers, but initial response was mute
  • Policymakers appear to be in no urge to act on rates soon, Governor Lowe to speak later

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The Australian Dollar showed a mute reaction, relatively speaking compared to earlier enhanced volatility, as the RBA left rates unchanged and offered little in terms of updates to its policy statement. This is what they had to say.

As far as inflation is concerned, the central bank added that prices are likely to remain low for some time. This followed the soft CPI report for the fourth quarter. However, a gradual pick-up in inflation is expected and the central forecast is for CPI to be a bit above 2 percent in 2018.

On a positive note, the Reserve Bank of Australia mentioned that a further gradual reduction in the unemployment rate is expected.

Policymakers again reminded us that rates are where they need to be to achieve the inflation target over time. Governor Philip Lowe added that the progress in reducing unemployment and having inflation return to target is likely to be gradual.

In the aftermath of the RBA rate decision, the Australian Dollar eventually succumbed to selling pressure. This may have been the case due to the lack of urgency from policymakers to act on rates. With overnight index swaps pricing in a 64.2% probability of an RBA rate hike in 2018, some of those hawks might have been a bit disappointed.

With that in mind, Governor Lowe will be presenting a speech later this week during Thursday’s trading session. Will he give hawkish speculators some hope? We shall see.

On a daily chart, AUD/USD continues heading lower after falling through a near-term rising trend line that dates back to December 2017. Yesterday, we calculated the upper and lower boundaries of where prices may remain for this week.

From here, continuation might leave the week range low around 0.7806 of the options-derived range as immediate support. A break below that would expose the 61.8% Fibonacci retracement at 0.7652. Should AUD/USD turn higher, the 38.2% level of 0.7894 might come up as resistance followed by the 23.6% level at 0.7986.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.