During the Asian session on Tuesday, the Reserve Bank of Australia will hold a regular monetary policy meeting. Its results are likely to spark increased volatility in the AUD/USD pair. The Australian dollar may either continue its upward run or turn 180 degrees, retreating from the recent highs. Starting from August 20, the aussie was benefiting from the greenback's weakness, having added almost 350 pips in just two weeks. The pair has climbed from the 71st mark to the middle of the 74th mark. At the same time, AUD/USD buyers did not dare to challenge the resistance at 0,7500 ahead of the RBA meeting. Besides, the US dollar also moved sideways amid an empty economic calendar and the celebration of the US Labor Day. Investors are cautious for a reason: the coronavirus situation in Australia is getting worse, so the RBA is likely to put stress on this fact.
Following the results of the latest meeting that was held in August, the Reserve Bank of Australia did not meet the most pessimistic expectations that were discussed by experts before the meeting. The regulator confirmed the decision taken at the July meeting to reduce the volume of purchases of government bonds from 5 to 4 billion dollars per week, starting in September. This fact came as a surprise to investors. Thanks to the RBA keeping the stimulus program, the Australian dollar managed to stay above the level of 72. Moreover, it grew significantly, having tested the boundaries of the 74th price level. More support came from Jerome Powell who produced quite indecisive rhetoric. Amid that, the greenback weakened across the market. As a result, the aussie approached the 75th level, holding steady ahead of the RBA decision.
The main reason for concern is still the coronavirus. In Australia, the Delta Covid strain, a more contagious one, has been spreading for the third month in a row. It has forced the authorities of the largest states to impose a strict lockdown. The largest cities of the country announced the isolation regime. However, there is a steady increase in cases and the number of deaths. Vaccination rates are rather weak - less than 40% of the adult population in the country has been fully vaccinated so far. At the same time, the head of the Australian government has recently said that the country would not lift quarantine restrictions until 70% of adults are vaccinated. According to preliminary estimates, it will happen no sooner than in November this year. Reportedly, many Australians are waiting for shipments of Pfizer and Moderna vaccines later this year. Australia has launched the production of the AstraZeneca vaccine, but many residents are reluctant to vaccinate with it due to rare cases of blood clots after vaccination.
Another reason for concern is a slowdown in economic recovery. Last week, the key macroeconomic reports revealed that the Australian economy grew at the slowest pace in the last four quarters in the second quarter of this year, having added just 0.7% on a quarterly basis. The revised data showed that the country's GDP increased by 1.9% in the first quarter. In annual terms, the economy grew by 9.6%. This record result is skewed due to the low base effect: the coronavirus pandemic led to a significant reduction in the GDP in 2020. Consumer spending increased mainly due to an increase in spending in the service sector, while government spending was fueled by a rise in health care costs. At the same time, the volume of private investment in the economy declined. It grew to 2% in the second quarter versus the rise of 6.2% in the first quarter. The indicator breakdown showed that the real estate, machinery, and equipment sectors were the least popular ones.
Importantly, the country was actually quarantined in mid-July. It means that the consequences of lockdowns will affect the performance in the third quarter. In fact, this must be the reason why traders ignored the strong data inflation in the second quarter. This release is no longer relevant in light of the latest "coronavirus" events.
Ahead of the RBA September meeting, many experts predict softening of the rhetoric of the bank's officials amid yet another coronavirus crisis that gripped Australia. Earlier, the Australian central bank indicated that "in the light of the high level of uncertainty about the prospects for the economy," it will adhere to a flexible approach to increasing or decreasing the size of weekly bond purchases in the future. Some analysts say the Reserve Bank of Australia will refrain from scaling back the stimulus at its meeting tomorrow. If so, the Australian is likely to weaken significantly against its major counterparts, and the US dollar in particular. The AUD/USD pair may decline to the first resistance level of 0.7400 (the lower border of the Kumo cloud at D1) and then to the next price level of 0.7350 (Tenkan-sen line on the same timeframe). If the RBA officials only voice their concerns about the latest events (without any specific conclusions), the dynamics of the pair will depend on the behavior of the greenback. In case of further weakening, AUD will challenge the 75th mark, where the main target will be the level of 0,7550 (the upper border of the Kumo cloud on the daily chart).