FX.co ★ AUD/USD: RBA October Meeting Preview

Tomorrow, October 3rd, the Reserve Bank of Australia (RBA) will announce the outcomes of its October meeting, the first meeting under the leadership of Michele Bullock. As known, her predecessor, Philip Lowe, stepped down at the end of September, handing over the reins to his deputy. However, the October meeting is interesting not only for this reason.

After the release of the latest report on Australian inflation growth, there has been talk in the market that the RBA may decide on another round of rate hikes within the current year. In tomorrow's meeting, the regulator might hint at the possibility of tightening monetary policy or even announce a rate increase at one of the two remaining meetings this year. The hawkish sentiments prevailing among AUD/USD traders ahead of the October meeting are providing support to the Aussie. The Australian dollar is showing resilience, holding off the pressure from the U.S. dollar bulls.

Last Friday, AUD/USD buyers tested the 0.65 level, marking a one-and-a-half-week price high. The upward momentum was triggered by the release of data on the growth of the core PCE price index. This crucial inflation indicator for the Federal Reserve predictably but significantly dropped to 3.9%. For the first time since September 2021, the reading fell below the four percent mark. Following this publication, the probability of the Fed raising interest rates in November decreased to 25%, according to the CME FedWatch Tool.

In response to this release, the U.S. dollar weakened across the board, including against the Australian dollar. AUD/USD buyers made their presence felt around the 0.6505 mark, just falling short of the 0.6510 resistance level (the lower boundary of the daily Kumo cloud). However, within the 0.65 figure, AUD/USD buyers couldn't hold on, and the pair ended the trading week at the 0.6435 level.

Nevertheless, bullish sentiments still dominate the pair. This is not only due to the increased demand for risk assets at the start of the new trading week (thanks to the U.S. Congress, which prevented a government shutdown through compromise decisions) but also because of the upcoming RBA meeting.

Recall that, according to data released last week, Australian Consumer Price Index (CPI) unexpectedly rose to 5.2% in August. After several months of decline, CPI started to rise again. The report's structure indicates that the most significant price increases occurred in the areas of housing, insurance and financial services, transport services, food, and non-alcoholic beverages. Inflation is gaining momentum, and this presents a challenge for the RBA and its new leader. Will the regulator react? In my opinion—yes. At least in a verbal manner.

Bullock has repeatedly stated, even before taking office, that the RBA may further raise interest rates to combat rising inflation. The August inflation data has only strengthened the belief that the Reserve Bank will adopt a more hawkish tone.

At the same time, it is unlikely that the interest rate will be raised directly at the October meeting, as the members of the regulator do not have data on third-quarter inflation. The relevant report will be published on October 25th, so by the November RBA meeting, they will have a complete picture.

According to the majority of experts (including UOB Group), the Reserve Bank of Australia is expected to keep the interest rate unchanged at tomorrow's meeting, but they may change the wording in the accompanying statement, hinting at the possibility of tightening monetary policy in November or December. This version is supported by the rise in August inflation and the risk of a sharp increase in average wages in the third quarter (after mandatory increases in minimum and bonus wages). China may also play an indirect role here: after a series of disappointing reports, China surprised with the growth of some indicators. For example, retail sales in China grew by 4.6% YoY in August, and industrial production increased by 4.5% YoY (with a forecast of 3.9% growth).

Therefore, the outcomes of the October RBA meeting could provide support for the Australian dollar, even if the central bank does not raise interest rates. If the regulator tightens its rhetoric (which is quite likely), buyers may return to the 0.65 level.

From a technical perspective, the AUD/USD pair is at a crossroads. On the D1 timeframe, the price is located on the middle line of the Bollinger Bands indicator, on the Tenkan-sen and Kijun-sen lines, but below the Kumo cloud. That is, at the moment, there are no clear signals for a downward or upward scenario. However, from a fundamental perspective, long positions appear more attractive, as the weakening U.S. dollar could encourage the Australian dollar to show strength in response to the potentially hawkish outcomes of the October meeting.