AUD/USD climbs after RBA rate hike, markets price in further tightening
- The Australian Dollar strengthens after the RBA delivers a widely expected 25 bps rate hike.
- Markets price further RBA tightening amid persistent inflation pressure.
- Dovish Fed expectations add upside bias to AUD/USD.
The Australian Dollar (AUD) trades on the front foot against the US Dollar (USD) on Tuesday, after the Reserve Bank of Australia (RBA) delivered a widely expected interest rate hike, lifting the Aussie broadly across the board.
AUD/USD is trading around 0.7011, hovering just below its intraday high of 0.7050 and up about 0.88% at the time of writing.
The RBA raised the cash rate by 25 basis points (bps) to 3.85% in a unanimous vote, marking its first rate increase since 2023, as policymakers responded to elevated inflation pressure.
In its monetary policy statement, the central bank said that “while inflation has fallen substantially since its peak in 2022, it picked up materially in the second half of 2025,” adding that the Board judges part of the recent rise in inflation reflects stronger capacity pressures. As a result, the policymakers consider that inflation is likely to remain above the 2-3% target for some time.
The central bank also noted that, while part of the recent pick-up in inflation reflects temporary factors, private demand is growing faster than expected, capacity pressures are higher than previously assessed, and labour market conditions remain slightly tight.
Meanwhile, Governor Michele Bullock said the Board will not provide forward guidance and will remain firmly focused on incoming data, stressing that policymakers do not yet know whether this move marks the start of a tightening cycle.
She added that the Bank “cannot allow inflation to get away from us”, noting that while the economy is in a good position, it remains constrained on the supply side.
According to a BHH report, the swaps market is now pricing in an around 80% probability of another 25 bps rate hike in May, and about 60 bps of total tightening over the next twelve months.
Looking ahead, monetary policy divergence between the RBA and the Federal Reserve (Fed) is likely to keep AUD/USD tilted to the upside, with markets pricing in around 50 basis points of Fed rate cuts by the end of the year.
Attention now turns to Australian employment data and the Services Purchasing Managers Index (PMI), both due on Wednesday, which could provide the next near-term catalyst for the Aussie.
In the United States, the Nonfarm Payrolls (NFP) report, originally scheduled for Friday, has been delayed due to the ongoing partial government shutdown, leaving investors to rely more heavily on private labour indicators, including ADP Employment Change. The US economic calendar will also feature the Services PMI on Wednesday.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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