Reserve Bank of Australia Preview: Policymakers at a crossroad

The Reserve Bank is having a monetary policy meeting this Tuesday and will unveil its decision at around 1:30 GMT. The central bank is expected to maintain rates on hold at 0.1% and the bond-buying program unchanged, after boosting it in February by A$100 billion from mid-April.  The focus shifts to government bond yields, as US ones are not the only ones soaring. Bonds volatility is somehow undermining the central bank’s actions, although with AUD/USD pulling off the 0.8000 level, policymakers may breathe today. However, the central bank had to intervene recently to keep the 3-year bond yield under control.

Upbeat economic outlook

Meanwhile, the RBA has maintained its upbeat outlook of the economy but also pledged to maintain the ultra-loose policy at least until inflation is sustainably within the 2%-3% target. The central bank expects GDP in 2021 will grow 3.5 per cent and return to 2019 levels in the second half of this year. On wages, policymakers may sound more concerned after Q4 figures showed a modest bounce from record lows, still depressed below the previous 2% quarterly average. Governor Philip Lowe said that he expects the unemployment rate to remain around 5.5% until the end of 2022.

The Australian dollar may suffer if policymakers stretch their outlook towards an economic comeback and a possible rate hike, although it’s quite an unlikely scenario. Policymakers may delay any conclusion on yields’ volatility effects on their policy until next month.

It seems unlikely that the RBA may be more optimistic than what it is already, although a non-dovish stance may boost the commodity-linked currency. Nevertheless, US yields, equities, and commodities prices will likely continue to have a stronger impact on the AUD.

AUD/USD possible scenarios

The AUD/USD pair is bearish in the near-term, but in the daily chart, the latest retracement seems just corrective. Technical indicators have corrected extreme overbought conditions but pared their slides around their midlines, now trying to bounce. In the meantime, the pair remains well above bullish 100 and 200 SMA while struggling to recover above a mildly bullish 20 SMA. Weekly basis, the bullish case remains firmly in place.

A break through 0.7690 could see the pair falling further, but buyers may surge ahead of the 0.7600 level. Bulls, on the other hand, may become more courageous if the pair surges above 0.7815, aiming then towards the 0.7900 figure.