AUD/USD marches towards 0.7000 as RBA aims to restrict policy further

• AUD/USD is eyeing to recapture the psychological resistance of 0.7000 despite the cautionary market mood.
• Economists at ANZ Bank see two rate hikes by the RBA to 3.85% amid upside bias for inflation projections.
• Fed’s Powell reiterated that the process of achieving price stability will take a significant period of time.

The AUD/USD pair has extended its recovery above the immediate resistance of 0.6960 in the Asian session. The Aussie asset is expected to recapture the psychological resistance of 0.7000 as the street believes that the current monetary policy by Reserve Bank Australia (RBA) believes is not restrictive enough to contain the galloping inflation.

Australian Consumer Price Index (CPI) is still in a rising trend led by global factors, higher energy prices, and an upbeat labor market. An absence of inflation peak projections indicates that the price index is in unchartered territory. Therefore, RBA Governor Philip Lowe has no option other than to continue interest rate hiking to address the inflation mess.

On Tuesday, the RBA announced a 25 basis point (bp) interest rate hike and pushed the Official Cash Rate (OCR) to 3.35%. Economists at ANZ Bank expect two more hikes in March and May. A note from ANZ Bank stated “We continue to expect that the cash rate target will rise another 25 bps in March and then to 3.85% by May 2023. We still see the risks to that peak as tilted to the high side given the momentum in inflationary pressure.”

Risk-perceived currencies are solidifying further despite China has declined a US request for a phone call between U.S. Defense Secretary Lloyd Austin and Chinese Defense Minister Wei Fenghe,” a Pentagon spokesman said on Tuesday reported Reuters. Meanwhile, S&P500 futures are showing marginal losses after a bullish Tuesday, portraying a cautionary market mood.

The US Dollar Index (DXY) dropped below 103.00 despite Federal Reserve (Fed) chair Jerome Powell reiterating that the battle against inflation is far from over. Fed’s Powell confirmed that higher interest rates will prevail for a longer period to achieve price stability. He further added, “The strong jobs report shows you why we think that inflation taming will be a process that takes a significant period of time.”