Reserve Bank of Australia Preview: On hold but a bit more optimistic

The Reserve Bank of Australia is having a monetary policy on Tuesday, but no changes to the current policy are expected this time. The central bank has clarified multiple times that they won’t adjust the current policy until inflation is “sustainably within the 2% to 3% target range.” According to the latest available data, inflation rose at 1.1% annual pace in the first quarter of the year.

Inflation, employment and growth

For inflation to reach such levels, wages growth will have to substantially increase, and that would require a tighter labour market.  Back in March, the central bank stated that it would not raise interest rates at least until 2024 when it sees a clearer recovery on both legs of the central bank’s mandate.

However, there’s still hope. Economic figures coming from the country have been improving, hinting the RBA may have to review its outlooks. The latest forecasts indicate that Australian policymakers expect the unemployment rate to fall to 6% by the end of 2021 and 5.5% by the end of 2022, while the Gross Domestic Product was foreseen expanding by 4% this year and 3.5% in 2020.

 Investors are hoping for an upward review in the overall outlook, but also for policymakers to retain a certain cautious stance, and repeat that they are ready to add quantitative easing if it’s needed. For sure, the latest data suggest that Australian central bankers could be much more confident on what's next for the local economy. Still, no fireworks are to be expected.

AUD/USD possible scenarios

The AUD/USD pair up ahead of the event, as investors are in a risk-on mood. Stocks are up after US data confirmed substantial growth in the country, despite missing the market’s expectations. From a technical point of view, the pair is trading between 0.77 and 0.78, lacking clear directional strength and currently recovering from a daily low of 0.7705.

The near-term picture suggests that the pair may accelerate its advance once above 0.7770, the immediate resistance level, although it would need to settle above 0.7820 to hint at further gains ahead. The main support is 0.7690.

Worth noting that the pair will continue to depend on the market’s sentiment. Higher equities and base metal prices will likely support a bullish extension, while a dismal mood will end up benefiting the greenback.