The ASX 200 Index retreated for two consecutive days, reaching a low of $8,760 from the year-to-date high of $9,000. This retreat may continue in the next few days as the Reserve Bank of Australia (RBA) prepares to buck the global trend on interest rates.
RBA set to hike interest rates
The ASX 200 Index continued falling while bond yields rose as market participants predicted that the RBA would deliver an interest rate hike on Tuesday. Most economists see the bank hiking rates by 0.25% to 3.85%.
If this happens, it will mean that the bank has taken a divergent view than other central banks, including the Federal Reserve and the European Central Bank (ECB).
Odds of an RBA rate hike soared after the Australian Bureau of Statistics (ABS) released strong jobs and inflation numbers recently. A report released last week showed that the core and headline inflation remained above the target at 2%.
The trimmed mean inflation report rose to 3.4% in the fourth quarter, higher than the expected 3.3%. Other inflation gauges, including the weighted mean and the headline figures remained above the 2% target. The government blamed the high inflation rate to the end of energy rebates and other temporary factors.
At the same time, the labor market has continued doing well in the past few months, with the unemployment rate continuing to fall and wage growth rising.
Therefore, analysts expect the bank to hike interest rates and maintain them at 3.85% in the foreseeable future. In a note, an analyst from GSFM said:
“Inflation is a clear and present danger, and attending to that danger now by raising the policy rate is the most appropriate response. Failure to do so may well necessitate more aggressive use of the policy rate instrument down the track.”
The rising odds of an RBA rate hike explain why Australian bond yields have continued rising in the past few weeks. Data shows that the five-year yield rose close to 4.8%, and analysts expect it to hit the key 5% target in the near term.
The RBA’s rate hike means that it has deviated from other global central banks that are in an easing cycle, which explains why the Australian dollar has rebounded in the past few months.
ASX 200 Index technical analysis
The daily timeframe chart shows that the ASX 200 Index has been in a strong uptrend in the past few weeks, moving from a low of $8,382 in November last year to a high of $9,000 this year. It has now pulled back to the current $8,755.
The index has moved below the lower side of the ascending channel. It has moved below the 50-day Exponential Moving Average (EMA).
It has also moved to the Major S&R pivot point level. Therefore, the most likely scenario is where the index continues falling, with the next key target being the key support level at $8,500. On the flip side, a move above that level at $8,900 will invalidate the bearish outlook.
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