The pair looks to have reached an inflection point that is leading to a deeper pullback from its recent 13-year high. The RBNZ held its Official Cash Rate steady at 2.25% today but delivered a hawkish surprise. The central bank revealed that its decision was split 3-3, forcing a casting vote, and explicitly warned that interest rates will likely need to be increased sooner and more aggressively than previously forecasted. Traders rushed to price in a rate hike coming already at the next meeting in July with probabilities standing at 73%.
On the AUD side, the RBA recently softened its tone following a rate hike that pushed the cash rate to 4.35% with one dissenter voting for keeping rates unchanged. The meeting minutes and recent remarks from Chief Economist Sarah Hunter indicated that policymakers are increasingly leaning toward a pause as they gauge the economic impact of previous hikes.
A surprise jump in Australia’s unemployment rate to 4.5%, the highest level since late 2021, has led traders to scale back expectations of further rate hikes last week. Today, the ABS reported that Australia’s monthly headline inflation unexpectedly slowed to 4.2% in April which would be way below RBA’s estimates. The latest Australia’s Flash PMIs have also showed significantly softer economic activity amid US-Iran conflict and RBA tightening. Markets are now seeing just a 61% chance of another hike by the end of the year.
The pair has been on a tear since July 2025 when the RBA surprised with a hawkish hold, while the RBNZ did the exact opposite signalling rate cuts if inflation pressure continued to ease. This divergence grew louder in the following months and pushed the pair to multi-year highs.
We are now seeing these forces working in the opposite direction with traders scaling back the hawkish RBA bets, while increasing them for the RBNZ. We can also say that the pair has moved too far too fast and that could lead to a more aggressive unwinding. A pullback to the 1.1930 area should come pretty quickly, with a break below the major trendline likely leading to a correction to the 1.15 handle
