AUD/USD: RBA Holds as Inflation Risks Keep Rate Cuts in Check

• RBA left rates at 4.1%, highlighting inflation risks on “both sides.”
• Labour market still tight, productivity concerns remain
• Markets price a 78% chance of a 25bp cut in May
• AUD/USD downside risks building

RBA Keeps Rates Steady at 4.1%

The Reserve Bank of Australia (RBA) remains cautious on Australia’s inflation outlook, suggesting risks remain on “both sides” after keeping the cash rate steady at 4.1% in April.

“Recent information suggests that underlying inflation continues to ease in line with the most recent forecasts,” it said. “Nevertheless, the Board needs to be confident that this progress will continue so that inflation returns to the midpoint of the target band on a sustainable basis. It is therefore cautious about the outlook.”

Balancing Act Continues

For those who have not followed the RBA closely, it chose a different path to most other central banks earlier in this cycle, opting not to lift rates as aggressively as others to preserve labour market gains coming out of the pandemic. The trade-off was a slower return of inflation to target.

While it kicked off its easing cycle in February—cutting the cash rate 25bp to 4.1%—the balancing act of lowering inflation while keeping labour market conditions strong continues, ensuring a cautious stance remains.

It also means commentary on those areas is far more important than other information contained in the policy statement.

The board continued to suggest labour market conditions remain “tight,” noting measures of labour underutilisation “sit at relatively low rates.” And despite wage pressures having “eased a little more than expected,” it countered that by noting productivity growth had “not picked up.” The board clearly wants to see productivity improve to feel confident that inflationary pressures will not re-emerge.

Of note, the board suggested private domestic demand “appears to be recovering,” with real household incomes having “picked up,” while there had been an easing in “some measures of financial stress."

While it acknowledged large amounts of uncertainty regarding the outlook, including U.S. trade policy, the remainder of the statement provided a strong reminder that the RBA is in no rush to cut rates further unless prompted. That may come from the March quarter inflation report due at the end of April or from a sharp rise in unemployment or market turbulence driven by trade uncertainty.

May Rate Cut Seen as Highly Likely

Source: Bloomberg

Any one of those plausible outcomes could be enough for the RBA to cut rates again on May 20, explaining why swaps markets currently price in a 78% chance of another 25bp reduction to 3.85%. However, if external conditions improve rapidly, it would challenge market expectations for three 25bp cuts this year.

Australian bond markets initially sold off on the tone of the statement, with the 3s10s ACGB curve marginally bull flattening—suggesting it was less dovish than expected. However, that move was later reversed, capping a small advance in the Aussie dollar immediately after its release.

AUD/USD: Downside Risks Build

Source: TradingView

AUD/USD broke the uptrend it had been sitting in for several months on Monday, holding beneath that level despite improving risk appetite. Sellers above .6259 are capping gains, with further resistance possible at the former uptrend and .6330.

On the downside, .6188 will be in focus, with a break of that level opening the path for a run toward .6088.

RSI (14) is trending lower and negative. MACD is slightly less bearish but also turning lower. Together, momentum signals remain neutral with a slight downside tilt.

RBA Governor Michelle Bullock’s press conference at 3:30 pm is the next key risk event for AUD/USD traders. Later in the session, the ISM manufacturing PMI and JOLTs survey could also generate volatility.

-- Written by David Scutt

Follow David on Twitter @scutty