AUD/USD pares some post-RBA gains and hits its highest level since mid-May

• The AUD/USD pair rebounds to its highest level since mid-May in reaction to the RBA’s surprise 25 basis point rise.
• Market caution revives USD demand and caps gains for the risk-sensitive Aussie.
• The fundamental undercurrent favors bullish traders and supports prospects for further gains.

On Tuesday, the AUD/USD pair gained ground for the fourth day in a row, reaching its highest level since mid-May. In cash, however, prices pare some of the intraday gains and trade around the 0.6650 zone, up almost 0.50% on the day heading into the North American session.

The Australian dollar (AUD) strengthened broadly in reaction to the Reserve Bank of Australia’s (RBA) surprise 25 basis point rate hike and provided a nice boost to the AUD/USD pair. The unexpected rise for the second month in a row puts benchmark interest rates above 4% for the first time in almost 12 years. Furthermore, RBA Governor Philip Lowe acknowledged that inflation remains too high and that high prices would do more economic damage than a short-term interest rate hike.

Elsewhere, the central bank remains hawkish and has stated that further monetary policy tightening may be needed to bring inflation back into its target range within a reasonable timeframe, further supporting the Australian dollar. That being said, the prevailing caution in equity markets helps reignite demand for the safe-haven US dollar (USD), which discourages bulls from placing further bets on the AUD/USD pair and caps any upside. extra, at least for now.

However, any meaningful rise in the USD looks constrained amid expectations of an imminent pause in the Federal Reserve’s (Fed) monetary policy tightening cycle. In fact, current market prices indicate a higher probability that the US central bank will leave interest rates unchanged at its next policy meeting on June 13-14. This translates into a further decline in US Treasury yields, which, in turn, should act as a headwind for the dollar and supports prospects for further AUD/USD appreciation. .

The aforementioned fundamental background suggests that the path of least resistance for spot prices is to the upside and any significant pullback could still be seen as a buying opportunity. No relevant US economic data will be released on Tuesday. Therefore, market participants are now waiting for RBA Governor Philip Lowe’s speech and the release of Australia’s Q1 GDP report for any significant momentum during the Asian session on Wednesday.

technical levels