Aussie gives up RBA gains as Fed, ECB loom

RBA shocks with 25bps hike

The AUD/USD drifted lower overnight, giving up earlier gains, as US shares fell ahead of tonight’s all-important US Federal Reserve decision.

Earlier, the AUD/USD jumped more than 1.0% after the Reserve Bank of Australia surprised markets with a 25-basis point rate hike.

Going into the decision, the market saw a less-than 20% chance of an RBA rate hike (source: Refinitiv).

The RBA’s recent actions, not hiking in April and suggesting it wanted time to assess the impact of rate hikes, had lulled markets into a false sense of security – a pause of more than one month was expected. Instead, after no move in April, the RBA lifted again this month, pushing official rates from 3.60% to 3.85%.

The AUD/USD ended 0.5% higher. For now, the AUD/USD remains in the well-defined range – with support seen at 0.6550 and resistance seen at 0.6800.

Kiwi gains ahead of local jobs

The New Zealand dollar outperformed even after the RBA hiked rates with markets looking ahead to today’s NZ employment data.

The NZD/USD gained 0.7%.

NZ employment remains tight and is one of the major drivers of the Reserve Bank of New Zealand’s move to raise rates to 5.25%.

Today’s unemployment rate is forecast to climb from 3.4% in the December quarter to 3.5% in the March quarter. NZ jobs are due at 8.45am AEST.

Fed, ECB to drive “divergence” trade

Central banks remain the focus as the US Federal Reserve meets overnight and the European Central Bank decision due on Thursday evening.

FX markets have recently been driven by diverging rate expectations – the USD index has fallen to 12-month lows as markets look to Fed cuts in the second half of this year. On the other hand, the euro has gained strongly as markets bet on at least three more hikes from the ECB.

The central bank decisions over the next 24 hours will go some way to determining whether these views are well founded – or whether markets are in for another shock.