Aussie rallies after surprise decision by central bank

Australian dollar rallied on Tuesday for a second session against US counterpart, hitting two-week highs and becoming highest performing major currency after surprise decision by Reserve Bank of Australia to raise interest rates by 25 basis points, already returning to the path of policy tightening a hiatus in April.

Australian interest rates are now at 11-year highs with prospects for more rate hikes at upcoming meetings, in turn underpinning the Aussie. 

AUD/USD rose over 1.3% to 0.6717, the highest in two weeks, with a session-low at 0.6620, after rising 0.2% yesterday, the second profit in three days off six-week lows at 65.74.

Best Performer

The Aussie was the best performing major currency today following the surprise bullish decision by the RBA.

The Aussie surged against US dollar, euro, pound, Swiss franc, New Zealand dollar, and Canadian dollar to two-week highs, while hitting three-month high against yen at 92.43. 

RBA

The Reserve Bank of Australia surprised markets with a 0.25% rate hike to 3.85%, the highest since April 2012. 

The decision comes after the RBA paused its policy tightening in April following 10 successive rate hikes, in an attempt to reassess the situation.

The RBA said there might  be a need to extend policy tightening in order to achieve the 2-3 inflation target. 

The RBA said that inflation remains too high at 7%, and the bank will require more time and efforts before bringing inflation back to targets, while noting that tight labor markets have brought unemployment to 50-year lows. 

The RBA is expecting an inflation rate of 4% in 2023, and 3% in mid-2025, which means the RBA will carry on its path of policy tightening until the end of the year.