Dovish RBA pledge to remain patient boosts the ASX200

As widely forecast, the RBA elected to keep interest rates on hold this afternoon at 0.1% and ended its $350 billion quantitative easing (QE) bond-buying program.

Australia

 

The decision to end the bond purchase program “follows a review of the actions of other central banks, the functioning of Australia's bond market and the progress towards the goals of full employment and inflation consistent with target.

The bank also noted that “faster-than-expected progress has been made towards the RBA's goals, and further progress is likely.” In line with this, the RBA's central forecast “is for the unemployment rate to fall to below 4 per cent later in the year and to be around 3¾ per cent at the end of 2023.”

In contrast to other central banks who have recently abandoned the inflation is “transitory” narrative, the RBA’s central forecast is for underlying inflation to rise to around 3.25% in coming quarters before “declining to around 2.75% over 2023 as supply side problems are resolved, and consumption patterns normalize.” 

In recent weeks the Australian interest rate market has scrambled to price in interest rate hikes from April on the back of the hawkish Fed shift and expectations the RBA would feel the heat of rising inflation and bring forward its rate hike guidance.

Contrary to this, the RBA has maintained its dovish forward guidance “the Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”

In summary, the standoff between the rates market and the RBA is unresolved, with subsequent market data likely to become the catalyst for a rate hike towards the second half of 2022.

Turning now to the ASX200 which had a January to forget closing 6.35% lower on the back of volatility on Wall Street, and as surging inflation prompted traders to price in RBA rate hike lift off by April of this year.

This afternoon's more dovish than expected RBA meeting has bought the index some relief as it closed +34 points at 7006.

However, with Australian equities earnings season picking up a gear next week and expected to bring with it a degree of earnings risk, the volatility episode of January may extend into February

Technically,  the break of critical support at 7310/00 was a bearish development. Since that point, the ASX200 has reached and breached our 7000 downside target. A close back above 7200 is needed to alleviate the downside risks of a missing leg lower.ASX200 Daily chart 1st Feb

Source Tradingview. The figures stated areas of February 1st, 2022. 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

 

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