AUD Takes a Hit as RBA Signals Extended Pause in Rate Hikes

Australia's Reserve Bank (RBA) Governor Michele Bullock has struck a balance between hawkish and dovish policies, sending mixed signals to investors. In her latest remarks, Bullock noted that domestic demand and labour market conditions have been easing, as required to bring the economy back into balance.

However, she also emphasized that the RBA is prepared to increase the cash rate further if needed. This stance has led to a trimming of August rate hike bets from around 30% to 20%, according to RBA cash rate futures. As a result, the Australian Dollar (AUD) has dipped against major currencies and is edging towards key support at the 200-day moving average.

According to BBH's Elias Haddad, the risk of an extended pause in the RBA tightening cycle weighs on the AUD, with two main concerns: real GDP growth projected to be below potential over the next two years, and the current cash rate sitting near the top of the range of model-based central estimates of the nominal neutral rate.

In Haddad's view, these factors suggest that the RBA is likely to maintain a cautious approach, which would be a headwind for the AUD. The AUD/USD pair is currently trading at around 0.6904, with key support levels nearby.