RBA Suggests Readiness for Rate Cuts
- RBA indicates optimism in reaching inflation goals
- Market perceives increased likelihood of a 25bps rate reduction by February
- AUD/USD experiences a significant decline, testing critical support levels below 0.6400
The Reserve Bank of Australia (RBA) is signaling a potential shift towards lowering interest rates, showcasing enhanced confidence that inflation is trending sustainably towards its target of 2.5%. The bank's recent communications excluded previous language about maintaining a rigid stance, indicating a possibility for interest rate cuts.
In contrast to last month’s statement, which emphasized vigilance against inflationary risks and the necessity for a restrictive policy until inflation moves consistently towards the target range, the current tone offers a more optimistic outlook.
While the RBA cautioned that underlying inflation remains excessively high, it highlighted several dovish adjustments in its December assessment.
Specifically, the bank noted a more significant easing in wage pressures than anticipated and recognized that some inflationary upside risks seem to have diminished. Additionally, it observed that income growth and consumer spending have been recovering at a slower pace than initially forecasted.
The RBA also acknowledged that recent economic activity data has portrayed a mixed picture but leaned towards being softer compared to expectations.
Increased Odds for February Rate Cut
Source: Bloomberg
Market dynamics have shifted noticeably following the RBA's dovish commentary, with traders raising the probability of a 25bps rate cut at the upcoming February meeting to approximately 63%, significantly up from prior estimates of less than 50%. Market expectations now suggest that three cuts could occur by the end of 2025, placing the cash rate at 3.60%.
Leading up to the February meeting, the crucial forthcoming release will be the December quarter inflation report expected in late January. To facilitate progress toward the RBA's 2.5% target, a trimmed mean measure reading of 0.7% would create a solid foundation for the initial rate reduction. Deteriorating labor market indicators, particularly unemployment rates, would further bolster confidence that inflation could not only decline to the target but also maintain that level.
In the immediate future, attention will be focused on RBA Governor Michele Bullock’s press conference scheduled for 3.30 PM AEDT.
AUD/USD Tests Key Support Levels
Source: TradingView
Prior to the RBA announcement, the AUD/USD was already under pressure, largely due to a tepid market response to China's recent stimulus initiatives. Following the policy statement's release, AUD/USD sharply declined, revisiting crucial uptrend support just below the .6400 mark.
If the current support level fails to hold, the potential for further declines appears greater than for upward movements in the near term. A breach of this vital support could lead to a downturn towards .6385, which marked the low point during the Japanese market turmoil in August, with the November 2023 low of .6270 following as the next key level.
Current momentum indicators present mixed signals, heightening the need for careful analysis of price movements for directional insights.
