The AUD/USD pair slowly declined during the European session on Wednesday (May 8). Within 1 hour, the AUD/USD pair rebounded slightly to around 0.6571 after hitting an intraday low of 0.6564.

On Tuesday, the Reserve Bank of Australia (RBA) decided to keep interest rates at the highest level in 12 years (4.35%), suppressing the hawkish sentiment reflected in the market. Prior to the meeting, the market anticipated a 43% chance of another rate hike in September; currently, this figure is around 5%.

The main obstacle facing the Reserve Bank of Australia is the recent rebound in inflation. The quarterly and annual inflation indicators for the first quarter exceeded expectations, and the monthly inflation indicators for March further added to the unexpected trend in the data. Inflation has proven difficult to control, but Australia is going through a particularly difficult period.

RBA Chairman Michele Bullock (Michele Bullock) said she doesn't necessarily think the board needs to raise interest rates again, but she doesn't rule out any possibility. She further expressed her disappointment with the first-quarter inflation data, saying that the RBA hoped the economy would not have to bear higher interest rates, but if service sector inflation stagnates, the committee would have to act.

What is even more shocking to the market is that although inflation expectations are clearly higher and more stubborn, the Reserve Bank of Australia still adheres to its current monetary policy stance. The latest RBA staff forecast that the inflation rate from June to December will be 3.8%, falling only to the target range of 2-3% by December 2025. The central assumption of this forecast is that interest rates will remain unchanged until mid-2025 — 9 months longer than the February forecast. As a result, since this bottom is set below the Australian dollar interest rate, the immediate disappointment brought about by the weakening Australian dollar will eventually find support. Other major central banks are seriously considering or are about to cut interest rates — this may help support the Australian dollar if there is no substantial risk aversion in the global economy.

AUD/USD's Disappointment May Self-Correct

(AUD/USD daily chart source: eHuitong)

The decline in AUD/USD is understandable, as the RBA failed to meet hawkish expectations, and disappointment is showing through the weakening of the Australian dollar. The recent strengthening of the US dollar also helped prolong this trend, but the Reserve Bank of Australia's latest forecast indicates that there may not be much room for moderation in the Australian dollar for the rest of the year, which may cause the Australian dollar to stabilize.

The inflation rate is expected to rise and remain high until 2025. As major central banks seriously consider lowering policy interest rates, the Reserve Bank of Australia may be forced to keep policy interest rates stable. Improved spreads and current global risk appetite could benefit the Australian dollar.

The current pullback is likely to extend to the 200-day simple moving average (SMA), currently at 0.6519, which is the next support level after falling below 0.6580. Weak US employment data (NFP, average hourly wage) has also quelled expectations of another acceleration in US inflation, which may have an impact at the beginning of a relatively calm week. Another thing worth noting about the US dollar is that despite lower US Treasury yields, there is a difference between the recent rise in the dollar. If the dollar follows lower yields, the AUD/USD pullback may lose momentum.

At 17:48 Beijing time, AUD/USD reported 0.6572, a decrease of 0.38%.