The Reserve Bank of Australia (RBA) Board has delivered a dovish surprise at its October meeting. AUD/USD moved sharply lower following the decision and economists at Danske Bank expect the pair to weaken over the coming months.

Recent tightening in financial conditions to constrain economic activity with a lag

“The RBA surprises dovish by hiking rates by only 25 bps. Consensus was looking for another 50 bps hike, while market was split between 25 and 50.”

“While Australian inflation remains clearly above target and labour market conditions are still historically tight, RBA emphasized the weakening global growth outlook as a key reason to slow the pace of hikes back to 25 bps.”

“Market's longer-term inflation expectations have moderated, and RBA sees that the recent tightening in financial conditions will continue to constrain economic activity with a lag.” 

“We see risks tilted towards further AUD weakening on a 12M horizon.”