SYDNEY: The Australian dollar held steady on Wednesday, supported by improved global risk sentiment following a decline in oil prices, while inflation data did little to shift expectations for further interest rate hikes.
The Aussie hovered near $0.6995, recovering from an overnight low of $0.6939. Key support is seen around $0.6897, with resistance levels at $0.7015 and $0.7124.
The New Zealand dollar also remained largely unchanged at $0.5840 after rebounding from $0.5795 overnight, with support at $0.5765 and resistance at $0.5891.
Data showed that Australia’s consumer prices were unchanged in February, bringing annual inflation down slightly to 3.7% from 3.8% in the previous month. Core inflation came in marginally below forecasts at 3.3%, but remained above the Reserve Bank of Australia’s target range of 2% to 3%.
Rising energy costs are expected to push inflation higher in March.
“The roughly 45% lift in petrol prices means that petrol itself will add around one percentage point to March quarter inflation,” said Diana Mousina.
“In the near-term, we think the RBA will prioritise managing inflation expectations and hike interest rates in May,” she added. “Another hike is possible if there is a larger pass-through of higher oil prices into other parts of spending and if inflation expectations remain elevated.”
Markets are currently pricing in about a 50% chance that the Reserve Bank of Australia will raise its 4.1% cash rate at its May 5 meeting, with rates potentially reaching 4.75% by the end of the year.
Expectations for New Zealand have also shifted. Markets still anticipate tightening by the Reserve Bank of New Zealand, but have reduced bets on an early move after cautious remarks from Governor Anna Breman.
Pricing now suggests a 44% probability of a rate hike in May for New Zealand’s 2.25% cash rate, down from 68% earlier in the week. However, a rate increase remains largely expected by July, with rates projected to end the year around 3.0%.
Some analysts believe markets may be overestimating the pace of tightening. Andrew Boak said the central bank is unlikely to respond to short-term price increases, particularly given existing spare capacity in the economy.
“We continue to see the RBNZ on hold until December.”
