The Reserve Bank of Australia will announce the results of its May meeting on Tuesday. Most experts believe the regulator will raise interest rates by 15 basis points. There is hawkish sentiment supporting a 40-point hike to 0.5% and dovish views where the RBA is choosing a wait-and-see approach. However, the main scenario suggests a 15-point rate hike.
This scenario is likely to happen after inflation data in Australia was released. In quarterly terms, the consumer price index jumped to 2.1% (with a forecast of 1.7%), and in annual terms, it rose to 5.1% (with a forecast of 4.6%). The indicators reached 20-year highs, well above forecast levels. The structure of this release suggests that the strongest price increases were in fuels and lubricants - for example, gasoline rose by 11% in quarterly terms, and by 35% year-over-year. This was the fastest rate of price growth since 1990.
At the end of its April meeting, the Reserve Bank of Australia tied the issue of raising interest rates to the changes in key macroeconomic indicators, primarily the inflation and labor market. In their subsequent speeches, Philip Lowe and other members of the RBA also focused on this issue. The release came out in the "green zone", reflecting the jump in CPI growth.
However, the Australian Nonfarms did not show such a clear-cut result. According to the latest data, the unemployment rate in March remained at 4%. Although most experts predicted a further decline of the index to 3.9%, the figure remained at multi-year lows: the last time unemployment was in this area was almost 14 years ago, in August-September 2008. However, the growth rate of the number of employed (17,000 instead of the forecasted 30,000) and the growth rate of wages was disappointing. Given this result, buyers of the AUD/USD pair have to rely only on inflation.
Overall, the Australian regulator may disappoint investors tomorrow. Three factors speak against a tightening of monetary policy as early as the May meeting: weak wage growth, the coronavirus, and the election.
RBA head Philip Lowe has repeatedly lamented that the growth of wages is lagging behind inflation. The members of the Australian regulator may want to assess more recent reports in the sphere, which will be published on May 17, i.e. 2 weeks after tomorrow's meeting. Based on the data that the RBA members will hold a meeting on Tuesday, the conclusions may be disappointing. So far, wage growth is below the rate of inflation. This is a constraint, and a very strong argument for taking a wait-and-see attitude, at least until the June meeting.
RBA members may also be concerned about the pandemic. Last week, Australia recorded its first case of infection with a new variant of the Omicron strain, BA.4. The country's Department of Health has already suggested that Australia will face new variants, "which will spread more rapidly," within the next two months. Also, the number of new cases and deaths has already been increasing recently in New South Wales and Western Australia. According to the Department of Health, the next coronavirus wave will peak by June. Also, we can't forget the grim news from China, where there was a COVID-19 outbreak, which the authorities are now trying to curb.
As for the political factor, it cannot be ruled out either. The parliamentary elections in Australia will be held on May 21. According to the latest poll, the Labor party could get 53% and the ruling Coalition party may receive 47% of the votes. Local media have expressed doubts that current Prime Minister Scott Morrison will be reappointed in the federal election.
Thus, even though most experts anticipate a 15-point rate hike at tomorrow's meeting, the option of maintaining a wait-and-see attitude cannot be ruled out. In addition, after the release of inflation data, the market invested one round of rate hikes in the current prices. Therefore, for a large correction in the AUD/USD pair, the Reserve Bank needs not only to raise the rate but also to announce further steps in this direction. Most likely, the regulator will voice restrained rhetoric even if it does raise the rate.
In my opinion, it would be better to use any corrective pullback in the pair to open short positions. The higher the pair rollback, the better, because bears are approaching strong support at 0.7000 at the bottom line of the Bollinger Bands indicator on the daily chart. If the pair breaks through this level, it will open the way to 0.6900-0.6800. Therefore, the psychologically important level of 0.7000 is now the main target of the downtrend.