EURAUD Analysis – RBA hike

Date published - 24 Jun 2022

RBA hike, ECB anticipation, growth outlook

Key points

• RBA hikes rate higher than expected
• Cristine Lagarde(ECB) anticipated today
• The growth outlook appears to be on the downside

Fundamental analysis

RBA hikes rate higher than expected.

The RBA's rate decision was surprising, as the central bank agreed to raise its bank rate by 50 basis points overnight to 0.85%, while participants were debating between a 25 and 40 basis point increase.

The RBA raised rates more than expected in the wake of soaring inflation at 5.1%, its highest level since the early 2000s, which is likely to be even higher than expected last month. The central bank expects inflation to return next year to the 2-3% target range.

This change will strengthen the case for an even more aggressive pace of policy rate hikes by the RBA as long as the economy remains resilient and inflation persists. As a result, Australian bond yields are tightening further, with the 3-year rate jumping 12 basis points to its highest level since 2012 at 3.26%.

The RBA is likely to continue to raise rates rapidly in upcoming meetings.

Cristine Lagarde(ECB) anticipated today.

We think the ECB will maintain the 50 basis point hike scenario in this decision. While we expect the ECB to opt for a 25 basis point hike in July, recent inflation data has increased the probability of a 50 basis point hike.

Ms Lagarde has not explicitly ruled out this option. The nasty macroeconomic surprise of the day yesterday was the trend in German industrial orders, which contracted by 2.7% in April every month, completely missing expectations. As a reminder, in March, the contraction was -4.2%.

The growth outlook appears to be on the downside.

The fall in business confidence to one of its weakest levels since the start of the pandemic and the implementation of the first containment measures is therefore not surprising, with fewer and fewer businesses foreseeing an increase in activity in the next 12 months.

The future of the economy will therefore rely on the capacity of the current rebound in demand. (which already seems to be waning). To counterbalance the severe economic headwinds, namely geopolitical uncertainty arising from the war in Ukraine, supply tensions and the rising cost of living, which the tightening of monetary policy will most certainly enhance.

The coming months will therefore be challenging. Despite the encouraging pace of growth in the services sector, it is impossible to rule out the possibility of an imminent contraction of the economy.

Technical Analysis

Technically, the EUR/AUD price is on a short-term bullish trend and gaining momentum after the decision of the RBA. Today we should be cautious as the ECB might surprise the market with its interest rate decision, which might drive the volatility higher.

We are bullish on the pair for the short term, but uncertainty is rising as tomorrow is a big day for the EUR. If the ECB is less hawkish than the RBA, we might see a drop in the price, but considering the recent numbers from Europe, the ECB needs to take action to contain inflation and support the economy.

• The small bullish trend line resists and acts as a support.
• With higher lows, we need to confirm the bullish short term trend with a higher high.
• A significant resistance at 1.53 is not easy to break without a piece of fundamental news and volume.
• The candlestick from yesterday is higher than before, suggesting a continuation of the bullish trend.
• This currency pair's technical supports are at 1.4360 and 1.37, and the next resistances are at 1.5216 and 1.5703.

Analyst Insight

Overall the situation is tricky for the EUR/AUD as both the ECB and the RBA are signalling a tightening interest rate policy. The only difference is that the Australian economy might be stronger than the European one in the following months. China, the biggest driver of the Australian economy, is doing well after easing the restrictions.

On the other hand, the German economy is showing weakness currently and might affect other European weak countries such as Spain and Italy. Technically, the situation is bearish for the long term, and the EUR/AUD will try to retest the significant support at 1.43. Still, in the short time, the problem is the opposite as traders favorise the EUR anticipating the hike from the ECB.

In conclusion, the price is still in an extensive range between 1.52 and 1.43. Only a break of those two levels will confirm the long term trend.