The AUD languishes ahead of the RBA and Fed. AUD/USD: where to?

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For now, the Australian Dollar is under US Dollar dominance.

The Fed is poised to make big moves, while the RBA has yet to act.

On the horizon for RBA rate hikes: Will AUD/USD break out？

The Australian Dollar is still weak against the US Dollar, but it is holding up well against most major peers. The US Dollar is strong because the Federal Reserve is raising rates aggressively this week.

The Fed has hinted at several 50 bp rate hikes in the near future. Until recently, the central bank seemed dismissive of high inflation prints, calling them transitory'.

A temporary cost-push inflation argument would be valid in normal circumstances. The current situation is abnormal.

Supply chain bottlenecks are undeniably an issue, driving up prices due to scarcity. These logistical issues are likely to persist as long as China holds on to its zero case. Covid-19 law.

So, as long as supply constraints persist and monetary policy remains ultra-loose, consumers will compete for goods and services, further driving up prices.

The Fed has realized this and is now front loading' the hike cycle. The RBA will be well aware of this.

The AUD languishes ahead of the RBA and Fed. AUD/USD: where to？

Two key messages from recent RBA monetary policy meetings –

They said they would wait for the first quarter CPI.

They wanted proof that inflation was staying within target before raising rates.

CPI swept all before it. A headline rate of 5.1 percent will not sit well with a central bank that has consistently kept inflation within a 2-3 percent band over the business cycle.

The proof is in. Inflation is rampant, as are expectations. Those with CPI-linked awards saw a 3.5 percent increase in wages in the first quarter. Salary increases for awards rolling over this quarter are now set at 5.1 percent.

Recruiters in Sydney are openly discussing much larger wage increases to retain staff. Full employment in Australia, but monetary policy remains loose.

The Fed is panicking to return monetary policy to neutral. The RBA has more leeway than their trans-Pacific counterparts.

They are less likely to be in denial when the monetary policy committee meets on Tuesday. It's official: the RBA May meeting is on.

The RBA's hawkishness may provide short-term support for the Australian Dollar, but the US Dollar's direction is likely to dominate markets this week.