Preview: Anticipation rises for RBA's next move

[MongiIG]

As the RBA holds interest rates steady, analysts eagerly anticipate the release of July's meeting minutes for clues on the future of rate hikes, and its potential impact on the AUD/USD currency pair and the ASX 200 index.

 

Source: Bloomberg

 

Forex Indices Interest rate Consumer price index Cash Inflation

 Tony Sycamore | Market Analyst, Australia | Publication date: Monday 17 July 2023 

The Minutes from the Reserve Banks meeting in July are scheduled to be released Tuesday, July 20th at 11.30 am. At its meeting in July, the RBA kept its cash on hold at 4.10%.

The RBA's decision to keep rates on hold was largely expected by the rates market (80% priced). In contrast, about two-thirds of the forecasting community predicted a rate hike.

The RBA's reasons for staying on hold echoed partly why it paused its rate hiking cycle in April - to assess the impact of a cumulative 400bp or rate hikes over the past fourteen months.

In a July 4th media release, Governor Philip Lowe stated, "Interest rates have been increased by 4 percentage points since May last year", and today's pause "will provide some time to assess the impact of the increase in interest rates to date and the economic outlook."

Rate hike projections fall after soft US CPI print

The RBA retained its tightening bias and noted that the most critical factors behind the next rate move would be "developments in the global economy, trends in household spending and the outlook for inflation and the labour market".

After last week's sharp repricing in the rates market following the soft US CPI print, the probability of a 25bp rate hike from the RBA in August has fallen to just 27%, with a full rate hike not priced until November.

RBA cash rate chart

 

Source: RBA

AUD/USD technical analysis

The AUD/USD closed higher last week at .6837 (+2.04%), boosted by last week's lower-than-expected US CPI reading, which saw the US dollar and US yields collapse. The rally was also supported by prospects of further stimulus in China and the market-friendly announcement of Michele Bullock to head the RBA from September of this year.

In last week's update on the AUD/USD here, we noted that if the AUD/USD could get above resistance at .6700c, it would likely see the rally extend towards resistance at .6800/20. Of course, the AUD/USD didn't only retest .6820c after the softer-than-expected US inflation numbers. It retested the mid-June .6899 high before running out of steam.

The subsequent retracement leaves a potential double top in place at .6900c. This means the AUD/USD needs to see a sustained break above .6900c to open up a move to the next upside target - the psychologically important .7000c level. Beyond .7000c would come the year-to-date February high at .7157.

Aware that until the AUD/USD mounts a successful attack on .6900c, allow for a retracement back towards the 200-day moving average at .6700c.

AUD/USD daily chart

 

Source: TradingView

_{TradingView: the figures stated are as of July 17, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}