FX.co ★ AUD/USD: RBA leaves interest rate unchanged

The Reserve Bank of Australia (RBA) has left all parameters of its monetary policy unchanged following its July meeting. The interest rate remains at 4.10%, even though some experts predicted the implementation of a 25-basis point scenario. Still, majority of analysts were confident in the status quo being maintained. Their expectations were met: the RBA took another pause after its April break and the subsequent two rate increases in May and June. However, despite the implementation of a "moderate-dovish" scenario, the Aussie remained afloat. The AUD/USD pair settled into a drift at the border of the 67 figure, showing a bullish sentiment.

Deja Vu of the April Meeting

The seemingly illogical reaction of the Australian dollar to the results of the RBA's July meeting is quite simply explained. The Reserve Bank has not put an end to the current cycle of monetary policy tightening—in this case, one could figuratively speak of an ellipsis. The rhetoric of the accompanying statement sided with the Aussie, and this fact played a decisive role in the situation. One could speak of a certain deja vu: following the April meeting, the Aussie demonstrated a similar reaction, despite the announced pause in raising the rate. And as subsequent events showed, traders were not mistaken in their conclusions: the RBA shows remarkable flexibility, alternating pauses and hawkish decisions.

So now, market participants doubt that the regulator has crossed the final line. The rhetoric of the central bank's accompanying statement leads to such conclusions. Thus, the final communique states that the regulator may need "some further tightening of monetary policy" to ensure inflation returns to the target level within a reasonable timeframe. However, these decisions of the central bank will depend on how "the economy and inflation will develop."

Such verbal signals indicate that the Reserve Bank has left the door open for at least one more rate increase—this time to 4.35%. For instance, such a scenario is the baseline for a number of financial groups, particularly for Societe Generale, whose analysts have warned their clients that the RBA will increase the rate by another (at least) 25 basis points by the end of the year.

Interestingly, a Reuters survey published on the eve of the July meeting showed that economists were almost evenly divided in their opinions: 14 out of 31 expected a further 25 basis point increase in the rate. This explains the convoluted reaction of AUD/USD traders to the actual decision of the RBA.

Future Perspectives

Commenting on the results of the July meeting, Reserve Bank governor Philip Lowe stated that any further tightening of monetary policy depends on how the economy and inflation develop.

It is worth noting that the report on the growth of the consumer price index published last week largely determined the results of the July meeting: instead of the expected decline to 6.1%, the CPI fell sharply to 5.6% (this is the weakest growth rate since April last year). If inflation indicators continue to show a downward trend, the Reserve Bank may well take a "dramatic pause" until the end of the year (and beyond).

The problem, however, is that inflation in Australia is unstable. From December 2022 to March 2023, the consumer price index demonstrated a downward trend, dropping from 8.4% to 6.3%. In April, the indicator was supposed to decrease to 6.1%, but contrary to the forecasts of most experts, it rose to 6.8%. In May, a mirror situation occurred: the index fell sharply (to 5.6%) instead of the expected rise to the 7% mark.

The next meeting of the Reserve Bank of Australia will be held on August 1. By then, the central bank will have data on inflation growth not only for June but also for the second quarter. These releases will decide the fate of the August meeting.

Given such a disposition, it can be assumed that in the near future, the AUD/USD pair will be guided by the dynamics of the American currency. The RBA has left the situation in limbo, tying the question of raising the rate to inflation dynamics, so the Aussie will sharply react to "its own" key macroeconomic reports (primarily in the labor market and inflation). But until then, the greenback will set the tone for trading the pair.

Today, American trading platforms are closed as the U.S. celebrates Independence Day. But in the coming days, the dollar will once again make itself known, responding to the publication of the minutes of the June Federal Reserve meeting (July 5) and the Non-Farm Payrolls (July 7). These events will determine the direction of AUD/USD in the medium term.

The situation is currently uncertain. Long positions on the AUD/USD pair are advisable to consider after overcoming the resistance level of 0.6710 (Tenkan-sen line on D1). The nearest target of the upward movement is the 0.6820 mark: at this price point, the upper Bollinger Bands line coincides with the Kijun-sen line on the weekly chart. In the case of a downward scenario, the pair will return to the 65-figure area, specifically to the support level of 0.6570 (the lower Bollinger Bands line on the daily chart).