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RBA’s dovish outlook forces AUD to reverse recent uptrend

AUD - Australian Dollar

The Australian dollar tested fresh year to date lows overnight, drifting below 0.76 US cents, moving against broader market sentiment following dovish commentary from the RBA. Having touched intraday highs at 0.7660 in the lead up to the RBA policy announcement the AUD fell steadily through the afternoon, extending losses into offshore trade marking new lows at 0.7566. Policymakers surprised markets choosing to extend its QE programme and raise the bar for any future interest rate adjustment. While the RBA did upgrade its economic outlook, it suggested a return to labour markets conditions that would support a rate hike were unlikely to be met until 2024. Such a pessimistic and long-dated forecast suggests record low interest rates will remain unchanged for much longer than first anticipated. Australia exemplary control of COVID-19 and quicker than expected recovery in domestic economic activity had some analysts pricing in RBA policy tightening ahead of other major central banks. Today’s commentary suggests the RBA is in no rush to outpace its counterparts weighing on AUD upside through the short and medium term as the expected yield advantage evaporates. With risk demand still intact we expect the AUD will find support on moves approaching 0.7570 and 0.75 with resistance forming on breaks toward 0.7660/0.7680.

Key Movers

The USD found sustained support through trade on Tuesday, buoyed by extension in euro downside and a divergence in currency market movements and equity performance. The dollar index edged upward as the euro approached supports at 1.20 despite stronger than anticipated GDP data sets. Eurozone GDP contracted just 0.7% through Q4, well ahead of estimates suggesting a 2% decline. The positive print provides some hope the common market can rebound strongly, however with national lockdown still in place across many countries and the vaccine roll out slow, a H1 recovery is unlikely with growth suppressed through Q1 and Q2.

Our attentions turn now to the Bank of England policy meeting and monetary policy statement tomorrow. With the UK firmly entwined in the throes of the Pandemic and early Brexit adjustments weighing on the growth outlook we expect the BoE will maintain its accommodative policy platform. With expectations for a shift to negative rate moderating over recent weeks, any signal policymakers are considering further interest rate adjustments will weigh on the GBP. For now optimism and a rapid vaccine roll out continue to prop up sterling, and we expect the currency will hold onto gains above 1.35 with resistance on moves approaching 1.40.

Expected Ranges

AUD/USD: 0.7520 - 0.7660 ▼

AUD/EUR: 0.6280 - 0.6350 ▼

GBP/AUD: 1.7870 - 1.8120 ▲

AUD/NZD: 1.0580 - 1.0680 ▼

AUD/CAD: 0.9680 - 0.9820 ▼