• The Reserve Bank of Australia is set to leave the cash rate target unchanged at 3.60% to “assess the impact” of rate hikes.
  • Friday's Statement on Monetary Policy could be more important than the meeting.
  • The outlook for AUD/USD has deteriorated with the RBA's decision to pause.

The Reserve Bank of Australia (RBA) is expected to leave the cash rate target unchanged at 3.60% on May 2, following the decision made at the April meeting.

In April, the RBA stated, “The Board recognises that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt. The Board took the decision to hold interest rates steady this month to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook”.

Since then, inflation has slowed further and economic data has been mixed. So the context warrants an extended pause. Market participants also anticipate the RBA will stay on hold. The central bank will continue to mention that it is ready to act if necessary, considering that inflation remains above the target. Rate-cut bets by the end of the year have been reduced. Incoming economic data will likely weigh on monetary policy expectations. 

Inflation fell significantly during the first quarter but remains elevated. The Consumer Price Index dropped from 7.8% to 7.0%. The Producer Price Index fell in Q1 to 5.2% from 5.8%, the slowest pace since Q1 2022. The RBA expects inflation to continue its gradual decline. Only a change in this forecast could move the central bank from the “extended pause” it started in April.

On Friday, the RBA will publish its monetary policy statement. It is expected to downgrade inflation forecasts, in line with the extended pause decision. It will likely upgrade GDP growth forecasts. It will show how they see the economy and the outlook. 

Tuesday’s RBA meeting will be the first one since the Review of the Reserve Bank of Australia. Governor Philip Lowe said the Board will consider the recommendation in the coming meetings. 

RBA

AUD/USD and the RBA

The AUD/USD posted its lowest weekly close since early March and is testing levels under 0.6600, focusing on the year-to-date low at 0.6560/65. The Australian Dollar has lagged lately, driven by the RBA's pause, while other central banks are still raising interest rates, creating monetary divergence that weighs on the Aussie.

The pair seems to be vulnerable ahead of the RBA meeting. Not much impact is expected from the meeting. The central bank is likely to repeat the same message, leaving market participants with no new information. However, if the RBA suggests it could start hiking again soon, the Aussie could rally, at least until Friday's monetary statement. The signs of an extended pause ahead are what markets expect, so it should not significantly influence the AUD/USD.

The pair has accelerated to the downside. If it drops below the 0.6550 area, it has more room to decline. On the contrary, if it manages to remain above 0.6600, it could continue to move sideways between that level and 0.6770. A weekly close above 0.6800 should invalidate the bearish perspective.

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