AUD/USD and NZD/USD Fundamental Weekly Forecast – RBA to Change Forward Guidance on Timing of First Rate Hike

The Australian and New Zealand Dollars are putting in a mixed performance early Tuesday shortly before the Reserve Bank of Australia (RBA) releases its monetary policy decisions at 03:30 GMT. Ahead of the RBA releases, speculators are challenging the central bank’s contention that rates won’t rise until 2024.

At 0:49 GMT, the AUD/USD is trading .7525, up 0.0004 or +0.05% and the NZD/USD is at .7181, down 0.0006 or -0.09%.

RBA Meeting Widely Considered ‘Live’

“The RBA meeting is widely considered ‘live’ after the RBA failed to defend its 0.1% April 2024 bond yield target in the wake of stronger than expected inflation data last week,” said Commonwealth Bank of Australia analyst Kim Mundy.

“We expect the RBA will abandon the 0.1% target while also changing its forward guidance on the timing of the first hike in the cash rate from 2024,” she said. “In our view, AUD can fall if the RBA is not hawkish as market pricing, but may find support around the technical level of .7379.”

Traders Expect an Aggressive Fed

The Federal Reserve on Wednesday is expected to approve plans to scale back its $120 billion monthly bond-buying program put in place to help the economy during the coronavirus pandemic, while investors will also be focused on commentary about interest rates and how sustained the recent surge in inflation is.

Investors on Monday continued to increase their expectations that high and persistent inflation would force the Fed to raise interest rates sooner and faster than policymakers have projected. Contracts in Federal Funds futures now imply three quarter-point rate increases next year, versus two as of late last week, according to data from the CME Group’s FedWatch.

Goldman Sachs has brought forward its forecast by a year to July 2022 for the first post-pandemic U.S. interest rate hike, as the investment bank expects inflation to remain elevated.

“The main reason for the change in our liftoff call is that we now expect core PCE inflation to remain above 3% – and core CPI inflation above 4% – when the taper concludes,” Goldman’s chief economist, Jan Hatzius, wrote in a client note.

Goldman Sachs also expects a second interest rate hike in November 2022 and two rate increases each year after that.

Short-Term Outlook

The Kiwi could track moves in its Australian counterpart, while the broader market may also be sensitive to the bank’s tone in addressing inflation as its U.S. peers face similar dilemmas.

Since Aussie investors have been pricing in a sooner-than-previously-expected rate hike by the RBA, the AUD/USD may actually move lower if policymakers deliver exactly what they have been anticipating. It’s going to take an extremely hawkish RBA to spike prices higher. We don’t see that occurring.

If the AUD/USD and NZD/USD do spike higher, gains will be limited and sellers would come in to stop the move since the market is expecting the Fed to come out hawkish on Wednesday.

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James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.