Australian Dollar Slumps Against the Pound After RBA Signals Further Hikes Unlikely

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The Australian Dollar was the G10 laggard on the day the Reserve Bank of Australia announced interest rates would stay unchanged into year-end and perhaps through the early stages of 2024.

The Pound to Australian Dollar staged a 0.80% comeback to trade at 1.9250 after the RBA said inflation was falling as expected, limiting the urgency to raise interest rates again.

"The RBA Statement landed neutral as we expected but the lack of urgency would come as a disappointment to those looking for a hawkish hold," says a note from TD Securities.

The Australian Dollar to U.S. Dollar was down by 0.80% at 0.6560, "AUD/USD fell by about 40pips after the RBA left the cash rate on hold and kept its forward guidance unchanged," says Carol Kong, an analyst at Commonwealth Bank of Australia. "Judging by the reaction, AUD/USD fell because some investors were positioned for a hawkish tilt to the post‑meeting statement like the RBNZ."

The Euro to Australian Dollar was higher by three-quarters of a per cent at 1.6494.

"Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks," said the RBA's statement.

TD Securities points out the RBA's November statement focused on the risks that inflation will take too long to return to target.

"In contrast today's Dec Statement signaled that inflation was consistent with the target on a number of occasions," says TD Securities.

Instances of a more sanguine reading of inflation's trajectory include:

1) "Overall, measures of inflation expectations remain consistent with the inflation target"
2) "Wages growth is not expected to increase much further and remains consistent with the inflation target, provided productivity growth picks up"
3) "To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case".

The RBA said the February 2024 interest rate decision would lean heavily on how inflation in the services sector progresses from here.

"The RBA is not out of the woods, services inflation remains the risk but really there was nothing new of note in today's Statement to force home this message," says TD Securities. "The market has clearly read the lack of new signals to suggest the RBA hiking cycle is over."

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TD Securities sees the first RBA rate cut falling in the third quarter of 2024.

Daragh Maher, Head of FX Strategy at HSBC, says the Aussie weakened notably following the RBA's "dovish tilt".

"We believe markets were expecting a more hawkish statement given the unusually long time before the next RBA meeting on 6 February," he says.

The RBA said inflation in Australia is moderating while seeing limited risks wage growth would accelerate.

Looking ahead, HSBC's strategists reckon the Aussie Dollar could struggle to develop meaningful upside impetus.

"For AUD-USD, we think the most important factor is the direction of the broad USD next year and market expectations of Fed rate cuts over 2024 and 2025. We believe the current expectations of 200bp of Fed cuts by end-2025 are overly aggressive," says Maher.

In contrast, markets are expecting just 50bp cuts by the RBA by end-2025.

"As market expectations eventually converge from both ends, it should weigh on the AUD," adds Maher.