RBA Says Hikes Still Possible

The Australian Dollar is trading with a spring in its step across the European morning on Tuesday. Overnight, the RBA held rates unchanged, as expected. However, the tone of the meeting was a little more hawkish than most were expecting, catching the market somewhat off-guard. Traders have sharply scaled back their RBA tightening expectations over recent months, with most looking to gauge the likely timing of the bank’s first projected rate cut. However, the RBA was seen warning this month that further tightening could not be ruled out, noting that inflation was still too high.

Inflation Still too High

RBA governor Bullock acknowledged the pain being caused to “heavily indebted mortgage holders” but warned that the bank must “stay the course” on inflation. Indeed, in its latest inflation forecasts released overnight, the bank projects that inflation will only hit the midpoint of its 2%-3% target band in 2026.

RBA Vs ECB – Trading Divergence

With the RBA retaining a hawkish skew, AUD has risen across the FX space on Tuesday morning. Looking forward, the better opportunities to capitalise on AUD strength will come against currencies where the respective bank is subject to dovish market expectations. Traders are currently pegging the ECB to cut rates by April. If this pricing starts to come forward, this could create room for a fresh move higher in EURAUD near-term.

Technical Views

EURAUD

Following the rally off the 1.6249 level lows, the market has stalled for now into a test of the bear channel highs. Price is holding above the 1.6461 level currently, keeping focus on a potential channel break towards 1.6829. However, if we slip back below this level, focus shifts back towards a continuation of the bear trend and a fresh test of 1.6249. Notably, we have an active buy signal in the Signal Centre set at 1.6480 suggesting a preference to fade any move lower.