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AUD USD Climbs as RBA Holds Interest Rates but Edges towards Tightening Bias

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Signs that the Reserve Bank of Australia (RBA) continues to lean towards its next move on interest rates being a hike have pushed the Australian Dollar up over half a per cent against the US Dollar.

The AUD USD exchange rate climbed to 0.7643 today.

AUD USD Climbs as RBA Holds Interest Rates but Remains Upbeat about Australian Economy

The latest Reserve Bank of Australia (RBA) monetary policy meeting saw the Board opt to keep interest rates frozen at 1.5% for the 15th consecutive gathering.

Despite the decision in what was the last policy meeting of the year for the RBA, markets responded positively to the upbeat outlook held by Governor Philip Lowe.

The government noted the tightness in the labour market, which has seen unemployment fall to its lowest level in more than four years, and offered some optimism on the wage growth outlook (one of the key indicators for the RBA when deciding monetary policy):

There are reports that some employers are finding it more difficult to hire workers with the necessary skills. However, wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labor market should see some lift in wage growth over time.

Although Lowe signalled that the RBA was in no rush hike interest rates, and would not be pressured into early tightening just because other central banks in developed economies were getting more hawkish, overall his comments formed the case for the next move on interest rates to be a hike rather than cut.

This is helped the Australian Dollar to rebound from the lows hit yesterday after the US Senate passed a tax reform bill.

US Dollar (USD) Soft as Markets Await ISM Manufacturing Index

The US Dollar is slumping against the Australian Dollar and remains soft elsewhere.

USD continues to find support from the recent passing of a tax reform bill that will allow President Donald Trump to finally enact one of his cornerstone campaign promises.

The prospect of huge tax overhaul and the boost it could give the US economy has been the main reason behind the US Dollar’s frenzied appreciation in the months following Trump’s victory in the Presidential Election, although there have been many sell-offs on the fear that the President would be too distracted by other developments to put his plans into action.

At the same time, markets remained wary ahead of the release of tomorrow’s early-morning data – the ISM manufacturing composite index.

With the odds of an interest rate hike this month remaining sky-high, markets are now viewing developments through the lens of monetary tightening next year.

Therefore a strong result from the latest data would help build the case for the Fed to continue its normalisation cycle in 2018.

Australian Q3 GDP Figures Forecast to Leave AUD USD Exchange Rate Firm on Positive Economic Outlook

With the ISM non-manufacturing composite index is due out in the early hours of the morning tomorrow, markets are unlikely to pay much attention to tonight’s US trade balance figures for October.

Tomorrow’s third-quarter Australian GDP figures are expected to show a minor slowdown on the quarter from 0.8% to 0.7%, but a surge year-on-year from 1.8% to 3%.

Overall this is unlikely to upset AUD, with the economy generally performing strongly and the outlook remaining positive.

Tomorrow night’s US ADP employment change figure for November could cause some AUD USD exchange rate volatility in overnight trading.

The hugely-impactful non-farm payrolls report is due out on Friday and markets often think that the ADP figure gives an indication of how well or poorly this key economic measure has performed.

A strong ADP result would therefore boost the US Dollar, while a weak figure will see investors expecting the worst come the end of the week.