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Rate Hike in May! AUDUSD Bulls Under Pressure
Summary:
The Reserve Bank of Australia (RBA) shifted to a hawkish stance at its February policy meeting, providing some short-term support for the Australian dollar. However, markets are digesting the strong US January employment report and the subsequent scaling back of Fed rate-cut expectations, which has boosted the US dollar and exerted downward pressure on AUDUSD.
Sell
TradingAUDUSD
EXP
0.70462
Entry Price
0.67000
TP
0.73000
SL
0.70813 -0.00087 -0.12%
0
Point
Flat
0.67000
TP
CLOSING
0.70462
Entry Price
0.73000
SL
Fundamentals
Australia's labor market has stabilized after a previous slowdown and remains tight overall. RBA Assistant Governor Sarah Hunter noted that current labor market conditions are consistent with persistent inflationary pressures in the economy, and the central bank is monitoring developments closely to assess the durability of any inflation rebound. Hunter stated that economic dynamics have shifted in recent months, with the labor market stabilizing but still tight. She emphasized that the ongoing tightness in the labor market signals lingering inflationary pressures, which reinforce and interact with the inflation outlook.
On the policy front, the RBA raised the cash rate by 25 bps to 3.35% last week, reversing one of last year's three rate cuts. Data showed that trimmed-mean inflation rose to 3.4% last quarter, the fastest pace in more than a year. The RBA's own forecasts project inflation to reach 3.7% this year and remain above the 2–3% target band for an extended period. The central bank does not expect a significant loosening in the labor market in the near term. RBA Governor Michele Bullock warned that further rate hikes could be warranted if inflation remains elevated. Recent data have reinforced the view of constrained economic capacity. Australia's unemployment rate unexpectedly fell to 4.1% in December 2024, the lowest in seven months, suggesting the labor market may be tightening again. Hunter analyzed that the economic slowdown over the past few years was driven mainly by fewer job vacancies, lower worker mobility, and softer hiring, rather than rising unemployment.
In the US, non-farm payrolls increased by 130,000 in January, nearly double the forecast of 70,000. The unemployment rate unexpectedly declined to 4.3%, labor force participation rose, and average earnings growth accelerated. Job gains were concentrated in healthcare, social assistance, and construction. Although the downward revision to 2025 non-farm payroll figures highlighted last year's labor market weakness, markets widely view the January print as signaling a stabilizing labor market that may extend into 2026, a view consistent with Fed Chair Jerome Powell's remarks last month.The steady labor market gives the Federal Bank room to focus on its inflation mandate. Inflation remains well above the 2% target, with the January CPI due Friday in sharp focus.
Interest rate futures imply markets expect two rate cuts this year, but the first cut has been pushed back to July. Major financial institutions hold diverging views: Goldman Sachs and Morgan Stanley see a June cut; Citigroup shifted its call from March to April; and JPMorgan expects the next rate hike in 2027.
A Reuters poll showed most economists expect the Fed to stay on hold until Chair Powell's term ends in May, with a potential cut in June. Some also warned of risks of excessive easing under Kevin Warsh, a potential successor to Powell.
According to the CME FedWatch Tool, traders assign a more than 94% probability that the Fed will keep rates unchanged at its March meeting.
Technical Analysis
On the 4‑hour timeframe, AUDUSD shows narrowing Bollinger Bands and flat moving averages, with price oscillating between the mid‑Bollinger band and the EMA50. During the recent price high, the MACD lines formed a bearish crossover, and bullish histogram bars faded, signaling a bearish divergence. The RSI stands at 46, indicating deteriorating sentiment, with declining peaks suggesting downside risks at any time.
On the daily chart, Bollinger Bands are expanding upward and moving averages are trending higher, confirming the intact uptrend. However, MACD lines are converging and on the verge of a bearish crossover. The RSI is at 63, still in bullish territory, but with falling peaks, signaling bearish divergence. A short-term pullback is likely toward the EMA12 at 0.702 or the mid‑Bollinger band near 0.69.
Therefore, a short‑then‑long trading approach is recommended.
Trade Recommendations
Trade Direction: Sell
Entry Price: 0.707
Target Price: 0.67
Stop Loss: 0.73
Support: 0.7/0.69/0.67
Resistance Levels: 0.715/0.737/0.75
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