AUD/USD recovers as RBA's hawkish tone offsets concerns over split decision

• AUD/USD recovers after a more hawkish-than-expected press conference from the RBA.
• The Reserve Bank of Australia delivers a rate hike but reveals internal divisions.
• Markets remain cautious ahead of the Federal Reserve’s policy decision.

AUD/USD trades around 0.7090 on Tuesday at the time of writing, up 0.25% on the day, rebounding after an initial pullback following the Reserve Bank of Australia (RBA) monetary policy decision. The pair finds support from comments by Governor Michele Bullock, which help ease concerns over a narrow vote behind the rate hike.

The Reserve Bank of Australia (RBA) raises its Official Cash Rate by 25 basis points to 4.10%, in line with market expectations. However, the 5-4 split decision initially weighed on the Australian Dollar (AUD), as investors interpreted it as a sign of uncertainty within the policy board. The central bank nevertheless warned that inflation risks remain elevated, partly driven by rising energy prices amid geopolitical tensions.

During her press conference, Michele Bullock emphasized that inflation was already high before the recent Oil price shock, due to domestic demand exceeding supply. This clarification is perceived as relatively hawkish and supports the rebound in AUD/USD after the initial negative reaction.

Several financial institutions provide mixed assessments of the decision. Commerzbank notes that the limited reaction of the Australian Dollar reflects concerns about a stagflationary environment and the lack of a strong consensus within the central bank. Standard Chartered highlights that the debate focused more on the timing rather than the direction of policy, while still pointing to a potential terminal rate around 4.35%.

MUFG underlines that the tightening bias remains intact, with inflation risks and higher yields continuing to support the Aussie. ING, however, sees signs of fatigue in the bullish trend, although it still expects a gradual appreciation of the pair over the medium term.

Meanwhile, the US Dollar (USD) trades cautiously as investors await the Federal Reserve (Fed) policy decision. While the Fed is widely expected to keep rates unchanged, the focus will be on updated economic projections and guidance regarding the timing of future rate cuts. Goldman Sachs has already pushed back its rate-cut expectations, citing a higher inflation trajectory.

In this context, AUD/USD price action remains driven by the relative monetary policy outlook between Australia and the United States (US), as well as broader market sentiment surrounding inflation and geopolitical risks.