FX.co ★ AUD/USD: December RBA meeting preview

The AUD/USD currency pair at the start of the new trading week updated its local high, approaching the boundaries of the 67th figure, but then made a 180-degree turn and dropped by 50 points, reacting to the published macroeconomic reports. However, Monday's price fluctuations in AUD/USD should not be paid attention to, as on Tuesday, December 5, the Reserve Bank of Australia (RBA) meeting will take place. This event will undoubtedly provoke increased volatility in the pair; the question is only who will be the beneficiary of this volatility.

The last meeting of members of the Australian regulator this year will definitely not be routine. According to the general forecast, the RBA will keep all parameters of monetary policy unchanged, so all attention will be on the text of the accompanying statement and the rhetoric of RBA Governor Michele Bullock, who will hold the final press conference.

The Reserve Bank has recently voiced quite contradictory signals. Thus, according to the minutes of the November RBA meeting, members of the regulator acknowledged that inflation expectations could significantly increase if the interest rate is not additionally raised. At the same time, the Central Bank emphasized that it is extremely important not to allow "even a slight increase in inflation expectations." In November, Australian consumer inflation expectations rose to 4.9% (from the previous 4.8%). This indicator has been rising for the second consecutive month, and at a more active pace compared to the expectations of most experts. The November data was published after the last RBA meeting.

In addition, hawkish signals came from RBA Assistant Governor (Economic) Marion Kohler. According to her, the process of reducing inflation in Australia has been slower than previously forecasted, and, therefore, the return to the target level will be more prolonged. At the same time, Kohler noted that risks of accelerating inflation have recently increased (due to wage growth). She also warned that high inflation could lead to an increase in inflation expectations, and such a result is "very undesirable."

These are "hawkish" arguments that allow us to assume that the question of additional tightening of monetary policy by the Reserve Bank is not off the agenda. However, in opposition to hawkish arguments, there are opposing ones. First of all, we are talking about the dynamics of inflation growth.

Last week, October data on inflation growth in Australia were published. The release was not in favor of the Australian dollar, as the pace of inflation growth slowed down more than expected: the consumer price index came out at 4.9%, with a forecast of 5.2%. Note that over the past two previous months, this indicator has been gaining momentum, demonstrating an upward trend. Quite a sharp slowdown in monthly inflation is bad news for buyers of AUD/USD.

Additionally, the head of the RBA has softened her rhetoric recently. According to her, the regulator needs to exercise caution when making further decisions on raising interest rates. And although this remark can be interpreted in different ways (for example, in the context of a 15-point rate hike rather than 25 points), it is hard not to notice the softening tone of her statements. The dynamics of October inflation may further soften Bullock's stance on the prospects for further tightening of monetary policy.

Reports published on Monday are not in favor of the Aussie either. The ANZ job advertisements index, which is a leading indicator of official labor market statistics, came out in the red: against the forecast of a 0.3% decline, it collapsed to -4.6%. This is the worst result since December 2021. Another indicator, the volume of company operating profits, was alsoin the red, shrinking by 1.3% (against a forecast of a 1.2% increase). Retail trade volume also disappointed, contracting by 0.2% in October (the indicator entered the negative territory for the first time since June of this year).

As we can see, the situation is ambiguous: on the one hand, the Reserve Bank demonstrated a fighting mood at the last meeting, expressing readiness for additional tightening of monetary policy. On the other hand, subsequent events (slowing monthly inflation growth in October, weak data from China, softening rhetoric from the RBA head) increased the likelihood that at the December meeting, members of the Australian regulator would take a more cautious position, questioning the advisability of further monetary policy tightening.

In any case, the decision on the rate will be made at the February RBA meeting. By that time, data on inflation growth for the 4th quarter will be known, which will be crucial. Therefore, the baseline scenario for the December meeting is to maintain the status quo. However, the subsequent rhetoric of the Reserve Bank may have both a "hawkish bias" and "dovish notes." Given Bullock's recent statements, the second option is more likely: the head of the RBA may suggest that the November rate hike was probably the last in the current cycle of monetary policy tightening. In this case, the Aussie will come under significant pressure and decline at least to the 66th figure base.