AUD/USD extends recovery above 0.6730 as RBA looks to stretch rates further

• AUD/USD has scaled above 0.6730 after a recovery move ahead of the RBA policy.
• A fifth consecutive 25 bps rate hike to 3.60% is expected from the RBA.
• US Labor market data could be resilient as consumer spending was extremely solid in February.

The AUD/USD pair has stretched its recovery above 0.6730 in the early Asian session. The Aussie asset is looking to add gains further as the Reserve Bank of Australia (RBA) will announce the interest rate decision. The RBA is expected to continue its policy tightening spell further to sharpen its monetary tools in the battle against soaring inflation.

Last week, the Australian monthly Consumer Price Index (CPI) softened significantly to 7.4% for January from the multi-decade high of 8.4%. Australian inflation has remained highly sticky and has not reacted as expected to the higher rates by the RBA. Therefore, RBA Governor Philip Lowe is expected to restrict monetary policy further in achieving price stability.

Analysts at Standard Chartered are of the view that “A 25 bps hike to 3.60%. We recently revised the terminal rate to 4.10% from 3.50% previously. Specifically, the central bank is to hike by 25 bps each in March, April, and May. Trimmed mean CPI inflation eased to 1.7% QoQ in Q4-2022 from 1.9% QoQ in Q3 – still far too high. Inflation pressures are also very broad – we estimate that 84% of items in the CPI basket are rising by more than 3% YoY. These factors raise risks of a 50 bps hike in March.”

The US Dollar Index (DXY) has sensed barricades around 104.40 and is continuing its downside move toward the critical support of 104.10. S&P500 futures have added some gains in the early Asian session after a choppy Monday, portraying an improvement in the risk appetite of the market participants. The 10-year US Treasury yields look set to reclaim the 4% figure ahead.

Going forward, the US Dollar will dance to the tunes of the United States Automatic Data Processing (ADP) Employment Change (Feb) data, which will release on Wednesday. The economic data is expected to improve to 195K, lower than the former released of 105K. US Labor market data could be resilient as consumer spending has remained solid in February, which could propel the demand for more talent to address fresh demand for goods and services.