RBA poised to cut rates, Aussie edges higher

The Australian dollar is higher for a third consecutive trading day. In the European session, AUD/USD is trading at 0.6363, up 0.25% on the day.  Earlier, AUD/USD climbed as high as 0.6373, its highest level this year.

RBA expected to cut rates to 4.1%

The Reserve Bank of Australia meets on Feb. 18 and is widely expected to lower the cash rate by a quarter-point to 4.1%.  The money markets have priced in a rate cut at 90% and this would mark a milestone for the RBA, which has maintained rates since Nov. 2023.  While most of the major central banks are well into an easing cycle, the RBA has remained an outlier.

Why has the RBA been reluctant to lower rates? Headline inflation has fallen back to the RBA’s target range of 2-3%, but underlying inflation has declined more slowly. Underlying inflation is a more accurate gauge of inflation trends and the most recent inflation report, which was released at the end of January, showed underlying inflation falling to 3.2%. This appears to have cemented a long-awaited rate cut.

The RBA meeting also has significant political implications. Prime Minister Anthony Albanese’s Labor government is trailing the opposition and an election must be held by May. If, as expected, the RBA cuts rates, Albanese will be quick to claim that the government’s economic policies enabled the RBA to lower rates for the first time since Nov. 2020.

The US wrapped up the week with a soft retail sales report. January retail sales slid 0.9%, much worse than the market estimate of -0.1% and following a solid gain of 0.7% in December. This was the sharpest decline since March 2023, as severe weather and the Los Angeles fires dampened consumer spending. Annually, retail sales eased to 4.2%, down from an upwardly revised 4.4% in December and above the forecast of 3.7%.

AUD/USD technical

• AUD/USD is putting pressure on resistance at 0.6376. Above, there is resistance at 0.6401.

• There is support at 0.6344 and 0.6319.