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AUD/USD retreats as RBA mulls further rate cut

Early on Tuesday, the Reserve Bank of Australia (RBA) released minutes of its most recent policy meeting. Speculation has subsequently increased that the central bank could move to lower interest rates below the current 1.75% early next month, which would place substantial pressure on the Australian dollar. Rates were cut to this record low level in May primarily as a reaction to surprisingly low inflation readings.

The minutes of July’s meeting included the following statement: “The Board noted that further information on inflationary pressures, the labour market and housing market activity would be available over the following month and that the staff would provide an update of their forecasts ahead of the August Statement on Monetary Policy. This information would allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.”

With low inflation of major concern, Australia’s quarterly Consumer Price Index (CPI), the key inflation indicator, will be watched very closely when second quarter results are released next Tuesday. April’s shockingly low CPI for the first quarter (-0.2% vs +0.3% expected) was largely responsible for swaying the RBA to cut interest rates in May.

Immediately following Tuesday’s release of the meeting minutes, the Australian dollar dropped sharply as it began to price-in the possibility of an impending RBA rate cut even before next week’s inflation data release. This move was reinforced later in the day by a surge in the US dollar, which helped push AUD/USD down to a major support juncture. This confluence of support includes the key 0.7500 support level, the lower border of a well-defined uptrend channel, and the 38% Fibonacci retracement of the last major low-to-high bullish run.

With further speculation over RBA monetary easing and continued support for the US dollar due to positive US economic data and renewed Fed expectations, AUD/USD could likely breakdown below this support juncture. In the event of a strong breakdown, the next major support targets are around the key 0.7350 level followed by 0.7200 support.

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