AUD/USD continues oscilation near 0.7100 as markets weigh hawkish RBA against unfavourable macro backdrop

• AUD/USD continues to oscillate near 0.7100, higher by a substantial margin on the day, but below post-RBA hike highs.
• The RBA surprised markets with a larger than expected hike and hawkish guidance, boosting the Aussie.
• But against an unfavourable macro backdrop, many analysts caution against expecting a sustained AUD/USD recovery.

As has been the case since the start of European trade, AUD/USD continues to oscillate near the 0.7100 level, well below its post-larger than expected RBA rate hike highs in the 0.7140s, but still higher by about 0.8% on the day. To recap, the Aussie got a lift during the Asia Pacific session after the RBA lifted interest rate by 25 bps to 0.35% versus an expected 15 bps rate rise, and signaled the possibility of even larger moves ahead.

Analysts are now speculating that the bank might raise interest rates by 40 bps in June, while money markets continue to price the RBA’s benchmark interest rate reaching 2.5% by the end of the year. The quicker than expected start to the RBA’s widely anticipated tightening cycle triggered a hawkish reaction in Australian government bond markets, helping boost the Aussie, though FX strategists have warned that it may be too soon to bet on a longer-lasting AUD/USD rebound.

Technicians said the pair’s failure to test March lows in the 0.7160s was a bearish sign and suggested the appetite to sell rallies remains strong. More broadly, risk appetite in global equity markets remains ropey, US yields continue to nudge higher and the US dollar remains well supported with the DXY still close to multi-year highs. This reflects a market bracing for rapid Fed tightening, analysts have said, which bodes poorly for AUD/USD’s outlook.

Recall that the Aussie also has to worry about lockdowns in China, which appear to continue to tighten now in Beijing too, and the economic slowdown there as a result. AUD/USD bears will likely continue to target a test of sub-0.7000 annual lows in the near future, regardless of the RBA’s new and more hawkish stance.