The Reserve Bank of Australia kept the interest rate at the same level at its today's meeting, but at the same time, it announced the early curtailment of the stimulus program. This scenario was widely expected, so the Australian dollar reacted negatively to the results of the February meeting, declining to the level of 0.7035. But then, AUD/USD buyers recovered their losses – but only at the expense of the US dollar, which is currently weakening across the market. After all, the Australian regulator did not make "hawkish" conclusions regarding the fate of the interest rate despite the "hawkish" rhetoric of the accompanying statement. This issue is still hanging, despite numerous forecasts that the RBA will decide to tighten monetary policy in the second half of this year.
So, the RBA will end its bond purchase program worth 350 billion Australian dollars on February 10, amid strong ("much better-than-expected") economic data in the labor market and inflation. Initially, the regulator planned to curtail QE in May this year, but recent releases forced the Central Bank to significantly accelerate this process. The accompanying statement of today's meeting states that "the RBA's forecasts regarding the growth of core inflation in the past year have not been significantly justified." And indeed, the figures published last week turned out to be in the "green zone", exceeding the forecast levels. Australia's consumer price index in the 4th quarter of 2021 surged to 1.3% in quarterly terms, with forecasted growth of 1.0% and the previous value of 0.8% and to 3.5% in annual terms, with a forecasted growth of 3.2% and the previous value of 3.0%. The core inflation index (using the truncated average method) rose to 1.0% qoq and 2.6% yoy, which is the best result since 2008.
The growth of Australian inflation occurred amid the improvement in the situation of the labor market. The unemployment rate in the country sharply declined from 4.6% to 4.2%. This is a long-term record: the last time the rate was at this level was in July 2008. The increase in the number of employees also showed positive dynamics, whose growth was due to both part-time and full-time employment).
The Reserve Bank of Australia appreciated the latest releases, but at the same time decided only to end QE early. Meanwhile, the issue of raising the interest rate was put back by the regulator again. Commenting on the results of the February meeting, RBA Governor, Philip Lowe, noted that the very fact of the early curtailment of the stimulus program does not signal an imminent increase in the interest rate, which remains at a record low of 0.1%.
Arguing his position, the head of the Central Bank noted that although inflation is growing faster compared to earlier RBA forecasts, it remains lower than in many other countries. "The main forecast is that core inflation will continue to rise in the coming quarters to around 3.25% and then decline to around 2.75% by 2023," Lowe said.
The rhetoric of the RBA suggests that the regulator doubts that inflation growth in the country is sustainable. According to Lowe, there is currently uncertainty about how sustainable the rise in inflation will be as the supply-side problems are resolved. He also lamented the weak growth of the average wage. Lowe noted that wage growth remains average and it will probably take some time before the average wage reaches a level corresponding to a sustainable level of inflation.
It shows that the Australian regulator adhered to some issues today, which were taken into account in current prices and won back by traders in advance. Therefore, the results of the February meeting did not impress market participants, despite the curtailment of QE and the rhetoric of the accompanying statement, whereas Philip Lowe's "dovish" position was disappointing. For this reason, the Australian dollar reacted rather modestly to today's events. At first, it lost about 50 points, but then returned to its original position. In fact, the AUD/USD pair made a small circle and returned to today's opening (0.7068). This suggests that the Australian dollar is still not able to do things on its own, as it did not receive proper support from the RBA today.
It is noteworthy that most experts are still confident that the Central Bank will raise the interest rate in the second half of the year – in August or at one of the autumn meetings. These hawkish expectations will put background pressure on the Australian dollar every time Philip Lowe denies such rumors.
We believe that the Australian dollar will continue to follow the US dollar. As soon as the downward correction stage of the US currency ends, the AUD/USD bears will test the key support level of 0.7000 again. Last Friday, traders tried to consolidate within the level of 0.69, but the downward impulse faded amid the US dollar's general weakening. However, there is no doubt that in the wake of the next dollar rally, sellers will try to break through this price barrier again. Therefore, the current corrective pullback can be used as an excuse to open short positions with the main target of 0.7000.