Fundamental analysis

AUD/USD: ahead of the RBA’s November meeting

The extremely volatile last full trading week of October ended on Friday, October 28. Meetings of the three largest world central banks (Canada, the eurozone, Japan) were held. If the decisions taken by the European Central Bank and the Bank of Japan on interest rates coincided with market expectations, then the Bank of Canada made an unexpected decision, surprising investors. The bank raised its interest rate by 50 basis points to 3.75%, although markets had expected a 75 bp hike. The decision appears to have been prompted by growing concerns about the threat of a slowdown in the economy and a deepening global recession, and disappointed market participants.

Next week, market participants will focus on two main and key events: the Federal Reserve meeting and the release of the monthly report of the US Department of Labor for October.

In addition, the Reserve Bank of Australia and the Bank of England will also hold their meetings on monetary policy issues, moreover, the RBA meeting will be held on Tuesday.

Ahead of this event, AUD/USD shows mixed intra-weekly dynamics, although the overall global downward trend of the pair remains in place for now.

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When this article was written on Friday, AUD/USD was trading near the 0.6413 mark, falling towards the support level of 0.6382. Its breakdown would have confirmed the resumption of downward dynamics, although short positions can be opened already in the market, limiting the loss with a stop loss above 0.6480.

As a result of the October meeting, the RBA raised the interest rate by 0.25%, disappointing bulls on the Australian dollar. The RBA cited weakening growth prospects for the global economy as the main reason for this decision.

The decision to raise the rate by 0.25% came as a surprise to market participants who had expected a 0.50% increase. While the RBA’s accompanying statement said that “the central bank remains strongly committed to bringing inflation back to its target” and “expects further interest rate hikes in the coming period”, market participants viewed the decision as a mild one to further strengthen the Australian dollar. It fell sharply immediately after the announcement of the RBA’s decision.

In turn, at the very beginning of this week, the assistant governor of the RBA, Christopher Kent, said that “the RBA board expects further interest rate hikes in the coming period,” but “the size and timing of the rate hike will depend on incoming data.” Such a “vague” formulation of the thesis about the prospects for the RBA interest rate cannot serve as a basis for any significant strengthening of the AUD, while other major world central banks are aggressively raising their interest rates.

Now, at Tuesday’s meeting, the RBA is widely expected to raise interest rates by 0.25%. This will be the second consecutive increase of 0.25%. How market participants will react to it, while the Fed and other major world central banks continue to move with more confident steps in the cycle of tightening their monetary policies, is not difficult to guess. AUD is unlikely to strengthen much after such a decision by the RBA. Although, a lot will also depend on the accompanying statements of the bank’s management. Tough rhetoric of their statements regarding future RBA interest rate hikes may support the Australian dollar. In general, as we have already noted above, the general global downward trend of the pair is still in force.

The material has been provided by InstaForex Company – www.instaforex.com


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