AUD/USD falls after RBA hikes by less than expected – Daily Market Brief, October 4, 2022

The RBA raised interest rates by a smaller than forecast 25 basis points, ending a run of outsized hikes. The move lifts hopes that central banks won’t remain aggressive for much longer.

·         FTSE & GBP extend rebound after the Chancellor’s backtrack on top rate tax

·         Silver jumps 8% as treasury yields fall after weaker than forecast US ISM manufacturing data

·         Fed speakers and mid-tier data to shed more light on what to expect next from the US central bank

The Chancellor’s U-turn, reversing planned tax cuts for top earners, helped both the pound and the FTSE rise in the previous session. While the U-turn will only save the government around £2 billion of a £45 billion unfunded planned tax giveaway, the move, combined with Kwasi Kwarteng bringing forward his plan to get UK debt under control to this month, has calmed nerves surrounding UK assets.

The FTSE closed 0.3% higher yesterday and is set to rise 0.7% on the open today. Meanwhile, GBP/USD has climbed back above 1.13, and the pound trades at a three-week high versus the euro.

US manufacturing PMI

US stocks started the new quarter on the front foot, rebounding sharply as treasury yields eased, and the USD fell back from its 20-year high. The market mood improved following weaker than expected US ISM manufacturing data, which showed signs of a slowdown in the sector as demand cooled.

Precious metals were standout performers yesterday. Gold jumped 2.2%, and silver rose over 8% as yields eased and investors grew hopeful that the Federal Reserve could soon reduce the pace of aggressive rate hikes.

The upbeat mood is rising into Europe, with the DAX set to open over 1.4% higher. The economic calendar is relatively light, with just PPI under the spotlight, which is expected to jump to 43.9% YoY in August, highlighting the struggle that the ECB has to tame inflation.

EUR/USD holds above 0.98 on the upbeat mood and USD weakness.

RBA

AUD/USD is falling steeply, underperforming major peers, after the RBA hiked interest rates by a smaller than expected 25 basis points, bringing an end to a run of 50 basis point hikes. The surprise move takes the OCR to 2.6%. While RBA Governor Philip Lowe had hinted at a slower pace of hikes, the market had assumed that as the Fed was still expected to hike by 75 basis points and given the sliding value of the currency that, the RBA would stick with outsized hikes. The Australian economy has proved to be resilient to rising rates. However, policymakers know that the Australian housing sector is among the most indebted in the world, with many on variable mortgages, making it particularly vulnerable to aggressive rate hikes. AUD/USD trades below 0.65 at the time of writing.

Looking ahead

Investors will look towards several mid-tier data releases later today and a slew of Fed speakers for further clues over whether the Fed could consider easing back on rate hikes.

JOLTS job openings are expected to show that there are still 10.45 million vacancies in the US to be filled, highlighting tightness in the labor market. Meanwhile, US factory orders are expected to rise 0.3% MoM in August after falling 1% in July.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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