The AUD/USD pair reached a two-month price high, testing the 0.6520 mark. The last time AUD approached the 0.65 level was in September, but back then, AUD/USD bulls couldn't consolidate in that price range.
It's worth noting that the increase is not solely due to the US dollar's broad weakness. Hawkish expectations regarding the Reserve Bank of Australia's future course of actions are also pushing the pair higher, allowing the bulls to explore new price territories. The intrigue will be resolved on Tuesday, when the RBA concludes its second-to-last meeting of the year.
In the lead-up to this event, Reuters conducted a survey of 39 top economists regarding the possible outcomes of the November meeting. Experts displayed rare unanimity, with almost 90% of those surveyed (34 out of 39) indicating that they expect a 25-basis-point interest rate hike by the RBA.
The primary reason for the rate hike is inflation. Data released in mid-October signaled a slowdown in the rate of inflation. The Consumer Price Index (CPI) in the third quarter increased to 1.2% (quarter-on-quarter) after growing by 0.8% in the second quarter, with a forecast of a 1.1% increase. In annual terms, the CPI fell to 5.4% compared to a forecasted decrease to 5.3%. In monthly terms, the index rose to 5.6% in September, while most experts expected it to be at 5.3%. This indicator has shown an uptrend for the second consecutive month.
Such results led to the assumption that after the November meeting, the RBA would resume its cycle of monetary tightening following several months of pause. These assumptions were not made in vain, as the central bank has recently toughened its rhetoric, demonstrating a hawkish stance, so to speak.
Take, for example, the minutes of the October RBA meeting. This document was surprisingly hawkish and straightforward. The central bank indicated, among other things, that further tightening of monetary policy might be required, "if inflation turns out to be more persistent than expected." In addition, the central bank acknowledged that progress in lowering inflation had slowed, and the Board has a "low tolerance for a slower return of inflation to target than currently expected".
Last week, RBA Governor Michelle Bullock reiterated this sentiment, noting that the Bank has "always had a low tolerance for inflation." In another recent speech, she voiced a more hawkish stance, saying that the central bank would not accept inflation returning to target "more slowly than forecasted."
In other words, the RBA has been engaged in a "communication campaign" in the weeks leading up to this, preparing the ground for a hawkish decision in November. As mentioned earlier, 34 out of 39 economists surveyed by Reuters expressed confidence that the RBA would raise the rate by 25 basis points, bringing it to 4.35%. Two experts forecasted a 15-point increase, while only three respondents stated that the RBA might likely maintain the rate at 4.10%.
The question here is whether the upcoming rate hike is already priced into the market, or if the AUD/USD pair will react to the official announcement. This question is not trivial because the trading principle of "buy on rumors, sell on facts" still holds.
Typically, when implementing a widely expected scenario with little doubt (as is the case here), the initial market reaction is minimal (especially considering that the aussie is currently trading quite high, near the two-month highs). Traders will be focused on Bullock's press conference and the wording of the final statement. The subsequent rhetoric from the central bank's head and the statements in the accompanying announcement will play a key role in determining the pair's direction.
According to some experts, the November rate hike is not the last in the current cycle. Another quarter point rate hike is possible either in December or more likely in early 2024 (when data on fourth-quarter inflation growth is available). If Bullock suggests that the RBA is open to further actions, the aussie may gain substantial support. In that case, the AUD/USD pair will not only test the resistance level at 0.6550 (the upper Bollinger Bands line on the four-hour chart) but also approach the 0.66 level. However, if the RBA takes an extremely cautious stance, the aussie may drop back to the lower band of the 0.64 level (the lower band of the Kumo cloud on the daily timeframe) despite the actual rate hike in November. In my opinion, the RBA will maintain sufficiently firm wording implying another rate hike in the foreseeable future. Such a position will provide support to the Australian dollar, especially in the context of a weak greenback.
