Tomorrow, the Reserve Bank of Australia will hold its May meeting, which will determine the future prospects for monetary policy. Majority of experts believe that the regulator will keep all the parameters of the monetary policy unchanged – only one out of 30 experts polled by Reuters allowed the interest rate to be reduced to 0.05%. In my opinion, such a scenario is extremely unlikely: the level of communication of the RBA is at a fairly high level, while none of the members of the Central Bank has recently hinted at a rate cut at least in the near future.
At the same time, the tone of the RBA's rhetoric may noticeably soften compared to previous meetings.
First, Australia's inflation rate has slowed down. Based on the data released last week, the general consumer price index in the first quarter of this year came out at around 0.6%, instead of the forecasted growth to 0.9%. The indicator has been declining for the second quarter in a row, reflecting the slowdown in inflationary processes. In annual terms, the index was also in the "red zone", significantly not meeting the forecast value: the indicator came out at around 1.1%, while experts expected to see it at around 1.4%. In addition, core inflation also disappointed traders: the indicator went below the forecasted levels in both monthly and annual terms.
In other words, the release was a complete failure, confirming the concerns voiced earlier by the head of the RBA, Philip Lowe, about a possible slowdown in inflation growth this year. However, he expressed the corresponding concern about the period of the second half of the year, while the main components of the inflation release disappointed in the first quarter. This fact will undoubtedly affect the rhetoric of the members of the regulator and Lowe himself, who may allow the expansion of the incentive program at one of the summer meetings.
It can be recalled that the latest release of data on the growth of the Australian labor market also left a mixed impression: despite the decline in unemployment, the 90-thousandth increase in the number of employed was due solely to the growth of the part-time employment component, while the full employment component was in the negative area. It is worth noting that full-time positions imply a higher level of salary and a higher level of social security, compared to temporary part-time jobs. Hence, the decline in consumer activity of Australians and weak inflation growth. Therefore, the current dynamics may seriously worry the members of the Australian regulator.
In addition, we are talking about March data, when there was still a government subsidy program JobKeeper, which was used by about a million Australians. This program ended on March 26. According to most economists, this fact will inevitably affect the main indicators of the labor market, naturally in a negative way. Experts said that about 100,000 people in Australia will lose their jobs in the coming months – mainly in the tourism industry and in the restaurant sector. Therefore, April's "Australian Nonfarm" may come out in the "red zone", reflecting a slowdown in the recovery process.
As a result, the Australian dollar may come under noticeable pressure tomorrow, given the dynamics of key macroeconomic indicators. Analysts believe that the RBA may be one of the last to tighten monetary policy among the world's leading countries. Philip Lowe has previously stated on several occasions that the regulator plans to first reduce unemployment and bring inflation within the target range before starting to tighten monetary policy parameters. According to the Central Bank, this will happen no earlier than the second half of 2023. It can be recalled that the Central Bank extended the QE program in March, which was originally supposed to end in April. Reacting to the latest macroeconomic releases, the RBA may announce a new round of monetary easing. According to economists polled by Reuters, the regulator will keep the interest rate, but warn of a possible increase in the volume of bond purchases. Such results of the May meeting will put pressure on the Australian currency, which is already under the background pressure of the US currency.
From the point of view of technical analysis, AUD/USD sellers are currently testing the middle line of the Bollinger Bands indicator in the daily time frame. If the bears break through the support level of 0.7710, they will open the path to the next support level of 0.7675 (Kijun-sen line on D1). The main downward target in the medium term is the level of 0.7600 (lower line of the Bollinger Bands in the same time frame). This is a fairly strong level of support. However, the AUD/USD bears failed to consolidate below this target within the current year. Therefore, the "round" level of 0.7600 currently acts as a kind of price point for the AUD/USD pair.
