Australian Dollar Edges Up on Expectations of RBA's Hawkish Tone

Australian Dollar Edges up: The Australian dollar saw a slight uptick on Monday as market sentiment leaned towards the possibility of a more hawkish stance from the Reserve Bank of Australia (RBA) during its upcoming policy meeting. Investors even entertained the prospect of a rate hike, an outcome previously deemed unlikely.

The RBA is set to conclude its two-day meeting on Tuesday, widely anticipated to maintain the current rate of 4.35 per cent, unchanged since November last year. Among 25 analysts surveyed by Reuters, all but one forecasted a status quo, with the outlier predicting a hike to 4.6 per cent, citing persistent inflation pressures in the first quarter.

Market expectations reflect a marginal probability of a rate hike, standing at around one in ten, which could rise to four in ten by September. While major local banks like ANZ, CBA, NAB, and Westpac still anticipate a rate cut as the next move, likely not until November at the earliest, recent inflation data has prompted a reassessment of near-term forecasts.

The RBA may need to revise its inflation outlook upwards due to elevated domestic costs, testing the Board's confidence in inflation returning to its 2-3 per cent target band by late 2025, particularly with first-quarter inflation at 3.6 per cent.

Adam Boyton, ANZ's head of Australian economics, anticipates a more hawkish tone from the RBA, especially regarding persistent services inflation risks. NAB analysts expect the RBA to reintroduce a tightening bias, having shifted to a neutral stance in March, although CBA and Westpac remain sceptical of a swift change in direction.

Speculation surrounding a potential hawkish shift has kept the Australian dollar firm, hovering around $0.6615, after reaching a two-month high of $0.6650 last Friday following weaker-than-expected U.S. jobs data. Notably, significant resistance lies at the March peak of $0.6667.

Meanwhile, the New Zealand dollar remained stable at $0.6003, maintaining gains from a three-week high of $0.6050 reached on Friday. The Reserve Bank of New Zealand (RBNZ), scheduled to meet on May 22, is widely expected to maintain its 5.50 per cent rate, although markets are pricing in a cut by October following recent tepid employment figures.

With Reuters Inputs