RBA expected to cut interest rate amid growing US tariff concerns
- The Reserve Bank of Australia is set to cut the interest rate by 25 bps to 3.85% in May.
- Australian central bank Governor Michele Bullock’s comments and updated projections will hold the key.
- The RBA policy announcements would spike up volatility, rocking the Australian Dollar.
The Reserve Bank of Australia (RBA) is set to lower the Official Cash Rate (OCR) by 25 basis points (bps) to 3.85% from 4.1% after concluding its May monetary policy meeting on Tuesday. The decision will be announced at 04:30 GMT.
The updated economic forecast will be published alongside the policy statement, while RBA Governor Michele Bullock’s press conference will follow at 05:30 GMT.
With the rate reduction already priced in, traders will closely scrutinise the central bank’s updated economic projections and Governor Bullock’s comments for the next direction on interest rates and the Australian Dollar (AUD).
Focus on RBA’s next interest rate move
The recent series of Australian economic data releases have pushed back against markets’ pricing of more interest rate cuts by the RBA this year.
The Australian economy added 89K new jobs in April, beating estimates of a 20K addition by a wide margin, while March’s reading was revised to show the addition of 36.4K jobs instead of 32.2K previously reported. The Unemployment Rate remained unchanged at 4.1% in April.
Meanwhile, Australia’s first-quarter Consumer Price Index (CPI) rose 2.4% compared to the same period last year, coming in higher than the market expectations of a 2.2% increase, and unchanged from the 2.4% rise in the previous quarter.
Trimmed Mean CPI, the RBA’s closely-watched inflation gauge, rose 0.7% on a quarter-over-quarter (QoQ) and 2.9% on an annual basis. The RBA has an inflation target range of 2%-3%.
The Wage Price Index advanced 3.4% annually in the first quarter, exceeding the estimate and the prior reading of 3.2%. On a quarterly basis, wages increased by 0.9%, surpassing the 0.8% forecast.
The nation’s labor market remains strong while the underlying inflation is elevated, which could prompt the RBA to signal prudence on the policy outlook.
Besides, the revisions to the inflation and growth outlook will also help gauge the RBA’s path forward on interest rates.
Previewing the RBA policy decision, TD Securities (TDS) analysts said: “Overnight indexed swaps (OIS) markets have also fully priced in a 25 bps cut. Of interest will be the RBA’s assessment of the risks around tariffs. We see risks of minor downgrades to GDP, but doubt that CPI will shift materially.”
How will the Reserve Bank of Australia decision impact AUD/USD?
RBA Governor Michele Bullock is expected to caution about the economic and inflation outlook, particularly in light of the US tariffs. Therefore, she could reiterate, “have to be careful not to get ahead of ourselves on policy.” Bullock’s cautious remarks could revive the momentum of the AUD/USD recovery.
If Bullock raises concerns about the economic outlook while hinting at further rate cuts, the Aussie is likely to come under intense selling pressure, resuming its downside toward the 0.6300 level.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights key technical indicators for trading AUD/USD following the policy announcement.
“AUD/USD remains confined in a range between the 200-day Simple Moving Average (SMA) and 50-day SMA heading into the RBA showdown. The 14-day Relative Strength Index (RSI) holds above the midline, currently near 53, keeping the bullish potential intact.”
“A dovish cut by the RBA could send AUD/USD lower toward the 50-day SMA of 0.6333, below which the 100-day SMA at 0.6299 could be tested. If the selling pressure intensifies, the 0.6250 psychological level will be the line in the sand for buyers. Conversely, buyers need acceptance above the 200-day SMA at 0.6452 to resume the recovery toward the November 25 high of 0.6550, followed by the 0.6600 threshold,” Dhwani adds.
Australian Dollar PRICE This year
The table below shows the percentage change of Australian Dollar (AUD) against listed major currencies this year. Australian Dollar was the weakest against the Euro.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -8.10% | -6.47% | -7.90% | -3.08% | -3.89% | -5.31% | -8.18% | |
| EUR | 8.10% | 1.82% | 0.31% | 5.52% | 4.60% | 3.11% | -0.01% | |
| GBP | 6.47% | -1.82% | -1.49% | 3.65% | 2.73% | 1.27% | -1.83% | |
| JPY | 7.90% | -0.31% | 1.49% | 5.22% | 4.35% | 2.83% | -0.30% | |
| CAD | 3.08% | -5.52% | -3.65% | -5.22% | -0.94% | -2.30% | -5.29% | |
| AUD | 3.89% | -4.60% | -2.73% | -4.35% | 0.94% | -1.41% | -4.43% | |
| NZD | 5.31% | -3.11% | -1.27% | -2.83% | 2.30% | 1.41% | -3.06% | |
| CHF | 8.18% | 0.01% | 1.83% | 0.30% | 5.29% | 4.43% | 3.06% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Australian Dollar from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent AUD (base)/USD (quote).
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.