Australian dollar rises after RBA policy, at 21-month high vs euro

The RBA left policy rates unchanged but said that inflation will pick up during this year.

Reserve Bank Of Australia Reuters

The Australian dollar strengthened after the Reserve Bank of Australia announced its monetary policy despite having any specific hawkish indications in the statement other than saying that inflation will pick up during this year.

AUD/USD jumped to 0.7680 from near 0.7645 as the policy was announced. The Australian dollar was up 0.25% on the day around 1:15pm Singapore time.

So far this year, the AUD is up nearly 6.3% as uncertainties about Trump's incoming trade policies have weakened the greenback broadly and also helped by the big positive surprise in recent trade balance data from Australia.

EUR/AUD plummeted to 1.3948, its lowest since May 2015, making a 0.65% gain on the day for the Aussie.

The sharp gain against the euro was mainly helped by the European Central Bank statement that it is prepared to extend quantitative easing if inflation remains subdued in the single currency region.

Against the New Zealand dollar, however, the Aussie continued to slide thanks to the broad strength of the kiwi currency. AUD/NZD fell to 1.0379 from the previous close of 1.0462 but managed to rebound to 1.0421 after the RBA announcement.

At the policy review on Tuesday, the RBA left the benchmark interest rate at 1.5% as widely expected and said inflation will remain low for some time while projecting a GDP growth of 3% over the next two years.

The RBA, however, added that inflation will gradually pick up this year.

"The continuing subdued growth in labour costs means that inflation is expected to remain low for some time. Headline inflation is expected to pick up over the course of 2017 to be above 2%, with the rise in underlying inflation expected to be a bit more gradual," said the RBA governor Philip Lowe in the statement.

The central bank said that labour market indicators continue to be mixed and there is considerable variation in employment outcomes across the country.

"The unemployment rate has moved a little higher recently, but growth in full-time employment turned positive late in 2016. The forward-looking indicators point to continued expansion in employment over the period ahead," Lowe said.

AUD/USD Technicals

In the near term, the pair is seen targeting 0.7721 before a crucial 0.800 barrier. On the downside, levels like 0.7515 and 0.7308 will be watched ahead of 0.7159, a break of which will take it to a 1-year low.

In the big picture, the downtrend from 1.108 of mid-2011 is intact, and only a break above 0.8000 will challenge that trend. Beyond that, the market will eye 0.8660 as the next resistance ahead of 0.9500.