Above: File image of Governor Lowe. Image © Crawford Forum, Reproduced Under CC Licensing.

The Australian Dollar was an underperformer in global FX after global equity markets retreated amidst softer investor sentiment and traders reacted to fresh guidance from the Reserve Bank of Australia (RBA) as to the outlook for domestic interest rates.

RBA Governor Philip Lowe said interest rates need to rise further, but it was unclear how much further.

These guarded comments were not as committed to the need for further rate hikes as some in the market might have been expecting.

"RBA governor Lowe's comments during the parliamentary testimony might have weighed on AUD," says strategist Carol Kong at Commonwealth Bank of Australia.

The Pound to Australian Dollar exchange rate (GBP/AUD) advanced to 1.75, the Australian Dollar to U.S. Dollar rate declined 1.10% to 0.6910.

Lowe's comments were made in an appearance before the Senate Economics Committee in a regular evidence session.

He said "a quarter to half" of fourth quarter inflation is down to domestic factors, which is therefore of consequence to the RBA.

But he said demand was now moderating.

These comments push back somewhat against the market's 'hawkish' interpretation of the RBA's guidance delivered on February 07 when it hiked by 25 basis points and said further rate hikes were coming.

The Australian Dollar rallied after the RBA said in a statement that it "expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary."

The more muted guidance from Lowe, therefore, acts in an opposite direction for the Aussie Dollar.

The Australian Dollar is in fact the G10 underperformer at the time of writing, confirming the domestic RBA story to be having an impact:

Above: AUD performance on Feb. 15.

The decline in GBP/AUD spot to 1.7512 takes the transfer rate offered at standard high-street banks to around 1.7020, competitive holiday money and cash rates to around 1.7170 and competitive transfer provider rates to around 1.7460.

Also weighing on the Aussie Dollar at the time of writing is a softer sentiment on global markets, with investors selling stocks in response to rising interest rates.

U.S. and global bond yields have risen over recent hours, as investors react to the firm U.S. inflation data released on Tuesday.

The headline CPI inflation figure rose 6.4% in the year to January, beating expectations for 6.2% but representing a slowdown on the previous month's 6.5%.

U.S. bond yields rose in response as investors bet the U.S. Federal Reserve might have to do more by way of raising interest rates than previously expected.

The figures also lower the odds of an early interest rate cut in the U.S.

This raises the cost of money in the U.S., and indeed across the global financial system, which in turn weighs on the Australian Dollar.

The Australian Dollar remains highly correlated with the global growth cycle and tends to track movements in global stock market benchmarks.

The Aussie could therefore turn higher again if the market shakes off recent jitters and extend 2023's stock market rebound.