AUD/NZD climbs to near 1.0860 as RBA unexpectedly holds interest rates steady at 3.85%

• AUD/NZD attracts significant bids and jumps to near 1.0860 as the RBA surprisingly kept the OCR steady at 3.85%.
• The RBA kept interest rates steady to get more clarity on whether inflation is on track to return to the 2.5% target.
• Investors expect the RBNZ to leave the OCR unchanged at 3.25%.

The AUD/NZD pair jumps to near 1.0860 during the Asian session on Tuesday. The pair attracts significant bids as the Reserve Bank of Australia (RBA) has surprisingly kept its Official Cash Rate (OCR) steady at 3.85%.

Traders were increasingly confident that the RBA will reduce interest rates by 25 basis points (bps) to 3.6% amid downside economic risks and cooling inflationary pressures. According to the June 30-July 3 Reuters poll, 84% of respondents had predicted that the RBA will cut its key borrowing rates.

Theoretically, higher interest rates by the RBA bode well for the Australian Dollar (AUD) as they restricts the flow of the currency.

The RBA has signaled that current market conditions provide them to room to wait for clarity on inflation. The board judged "it could wait for more information to confirm inflation remains on track to reach 2.5% on a sustainable basis".

Meanwhile, investors brace for more volatility in the cross as the Reserve Bank of New Zealand (RBNZ) is scheduled to announce its monetary policy on Wednesday in which it is expected to leave its OCR steady at 3.25%.

This would be the first pause by the RBNZ since August 2024 when it started its monetary expansion cycle. Till then, the RBNZ has reduced its OCR six times by 225 basis points (bps). However, the RBNZ would leave the door open for further interest rate cuts amid downside economic risks in the face of global trade war due to the United States (US) tariff policy.