Australian dollar rallies over 1% after an unexpected 25 bps rate hike by RBA

Aussie rallies across the board after the Reserve Bank of Australia unexpectedly hiked its cash target rate by 25 basis points, to 3.85% on Tuesday morning, surprising forex investors when most had expected a pause in the rate hike cycle as it was the case in the previews meeting in April.

AUD/USD pair, 2-hour chart

AUD/USD pair added over 1% climbing to above the key $0.67 level, and recovering most of last week’s steep losses, which saw the pair bottoming at $0.6550 before bouncing higher.

The RBA decided to hike further its interest rates to curb persistent inflation in the country, where the inflation measure “Consumer Price Index (CPI)” stood at 7% in Q1, 2023, just above the forecasted 6.9%, and still well above the RBA’s target range of 2%.

The hotter-than-expected inflation has prompted RBA to consider more potential rate hikes ahead, although future action will largely depend on economic data and growth. The central bank forecasts 2023′s full-year inflation to stand at 4.5%.

RBA is also forecasting a below-average growth in the coming years, a 2023 GDP of 1.25%, well below the 2.7% growth seen in 2022, as high-interest rates weigh on business and consumer confidence, and as a post-COVID economic rebound runs out of steam.

Adding to the above, Australia’s largest trading partner, China, is also facing slower-than-expected economic and industrial post-Covid recovery, with the Chinese manufacturing sector unexpectedly contracting in April.