Reserve Bank of Australia Decision Preview

During its meeting, on Tuesday, August 2, the Reserve Bank of Australia is expected to hike the cash rate by 50 bps. The current cash rate is at 1.35%, a level that Australian monetary policymakers consider as ‘below neutral’, while they consider the neutral level is at least 2.5%.

Smaller rate hike has more chances than a larger one, as the RBA has to deal not only with raising inflation but also with slowing growth. A 50 bps movement would likely have a limited impact on the AUD/USD pair, with the focus on whatever is next in the RBA book.

The central bank accelerated the pace of tightening in June and has already hiked 125 bps in 2022, bringing the key rate to the current 1.35%.

Australian data released at the beginning of the day was mixed. The July AIG Performance of Manufacturing Index printed at 52.4, below the previous 54, while the S&P Global Manufacturing PMI for the same month resulted in 55.7, matching expectations given that TD Securities Inflation rose by 5.4% YoY in July from 4.7% in the previous month.

However, along with many other central banks, the RBA is struggling to control inflation without restricting economic growth. The annual inflation rate rose by 6.1% in the second quarter of the year from 5.1% in Q1. It was slightly below-expected but still on the rise.

It is unlikely that the central bank will hike by 75 bps, but there are some chances of a 25 bps movement. Policymakers could turn cautious considering the impact higher rates will have on household spending, slowing further economic activity.

A “smaller than anticipated rate hike” could also have a negative impact on the Australian dollar, sending the AUD/USD pair sharply lower, predominantly if the market sentiment deteriorates ahead of the policy announcement.

A 75 bps hike, on the other hand, could fuel gains towards the 0.7100 figure. Whether gains will be sustainable or if the rally will be seen as a selling opportunity will depend on investors’ perception of risk.

From a technical perspective, AUD/USD heads into the release with a bullish bias. The pair has neared the 61.8% retracement of its latest daily slide between 0.7282 and 0.6680 at 0.7050, the immediate resistance level ahead of the 0.7100 figure. A break through the latter will require a quite hawkish RBA hinting at an aggressive path ahead.

A move below 0.6990, on the other hand, will open the door for a slide towards 0.6910, the 38.2% retracement of the aforementioned decline.