Even with the RBA's interest rate hike decision, is the scope for the Australian dollar to rise limited?

According to the market analysis on February 2nd, multiple factors are emerging that suppress the upside potential of the Australian dollar. As the Reserve Bank of Australia (RBA) approaches a policy decision, the focus is on how much room there is for the currency to appreciate. Francesco Pesole, a senior analyst at ING Bank, points out that even if the RBA implements a rate hike, its effects may not be fully reflected in market prices.

Policy Legitimacy and Market Expectation Gaps

Unexpected inflation data in December and a robust real estate sector are strengthening the theoretical basis for additional rate hikes by the RBA. Normally, a tightening stance by a central bank would support the currency. However, Pesole suggests that the RBA should avoid signaling the start of a new monetary tightening cycle, which could limit the currency’s upward potential.

Market participants have already priced in at least one more rate hike by the end of the year. Typically, rising interest rates lead to currency appreciation. However, when evaluating the upside of the Australian dollar, the divergence between market expectations and the cautious stance of policymakers becomes a key variable.

The Impact of “One-Time” Signals on the Market

RBA’s communication will be a critical turning point. If the authorities send a signal that this rate hike is a “one-time” measure, the supportive effect of the rate increase on the currency could be significantly limited.

Market sentiment can quickly reverse depending on the policy stance. Not only the numerical interest rate hike but also the underlying policy framework and future outlook heavily influence traders’ decisions. This indicates that the Australian dollar is highly sensitive to policy signals.

Market Participants’ Scenarios Until Year-End

Several scenarios are expected moving forward. The first is that if the RBA hints at continuing monetary tightening, the Australian dollar could have room to rise. The second is that if the RBA emphasizes the temporary nature of the policy, the currency’s upside may be capped.

Over the coming months until year-end, macroeconomic indicators and the RBA’s policy judgments are likely to intersect. Factors such as inflation trends, labor market strength, and the degree of financial conditions easing will influence the dollar’s potential to appreciate. For market participants, the direction of the market remains uncertain until the next policy signal from the RBA.