RBA decision could be key to AUD direction in JuneHawkish RBNZ sets a high bar for RBA to meetCould break stale GBP/AUD range

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The Australian Dollar could advance if the Reserve Bank of Australia takes a lead from the Reserve Bank of New Zealand and signals the need to step up the pace at which it raises interest rates.

Focus falls on the RBA's June policy meeting that will likely see another rate hike announced, but the size of that hike and the guidance on future hikes will ultimately determine how the Australian Dollar trades.

"Australian dollar bulls hope the Reserve Bank of Australia takes a leaf out of the Reserve Bank of New Zealand's book and delivers an ultra-hawkish rate hike next month," says Robert Howard, a Reuters market analyst.

The RBNZ's raised interest rates by 50 basis points on Wednesday but it was the clear signal of intent to continue hiking aggressively until inflation came down that sent the New Zealand Dollar racing higher.

The closeness of the Australian and New Zealand economies inevitably leave investors drawing parallels between the policy responses of the RBNZ and RBA, therefore expectations for a strong RBA guidance will have risen in the wake of the RBNZ update.

"If the RBA raises rates by more than 25 basis points from 0.35% on June 7 and/or signals more hikes to come, the AUD could benefit," says Howard.

But should the RBA sound a more timid tone the Aussie Dollar could struggle.

Those watching the Pound to Australian Dollar exchange rate (GBP/AUD) will be hoping for any kind of action on June 07 given how incredibly stale the pair has been since April.

A look at the daily chart shows a continued consolidation such that the pair is now confined to a range of 1.76-1.78. (Set your FX rate alert here).

Given the importance of the looming RBA decision it could be the case GBP/AUD maintains this sideways walk until the June 07 policy decision.

Above: GBP/AUD has flatlined in May.

The market is currently pricing in a hefty 228 basis points of further hikes to come from the RBA in 2022, which is more than any other central bank.

The terminal 'high water' mark for the base rate is meanwhile seen at approximately 3.25% by mid-2023, according to money market pricing.

Therefore for GBP/AUD to break lower the RBA must meet these market expectations, or push that terminal rate higher.

But it must be noted the bar is set incredibly high for the RBA and it could be difficult to achieve this outcome, particularly since they place a heavy emphasis on Aussie wage dynamics.

With wages data underwhelming in the most recent update the RBA might not be in a mood to stoke rate hike expectations, posing disappointment for AUD bulls.

This could therefore be a catalyst that sends GBP/AUD higher and above the current consolidation range.

On a quarter-on-quarter basis the Wage Price Index rose 0.7% said the ABS, unchanged on the previous quarter and disappointing against the market's expectation for 0.8% growth.

The "data is consistent with our expectation that the RBA will deliver another 'business as usual' rate hike of 25bp at the June Board meeting – the Q1 22 WPI has certainly not made the case for a larger rate hike in June," says economist Gareth Aird at Commonwealth Bank of Australia.

"The official wages data has not made the case for a larger hike. Indeed the wage price index today highlights the risk of raising rates too high and too quickly given wages have so far been slow to respond to the tightness in the labour market," he adds.