The AUD/USD pair reacted negatively to the outcomes of the Reserve Bank of Australia's March meeting, which were announced during the Asian session on Tuesday. Although the central bank effectively implemented the basic, most anticipated scenario, as it held interest rates unchanged, the tone of the March meeting did not sit well with buyers of AUD/USD. The pair was actively falling and approaching the 0.64 level. The price has already reached a 2-week low, but the final point may be located at 0.6470 (the lower Bollinger Bands indicator line on the daily chart), and once the price breaches this mark, sellers may push the pair towards the 0.63 level.
However, it is too early to talk about it. First of all, let's understand the reason for such a negative reaction to the outcomes of the RBA's March meeting.
The key macroeconomic reports published in recent weeks have not helped in strengthening the hawkish stance of the RBA. For instance, inflation continues to fall. The Consumer Price Index came in at 4.1% in the final three months of 2023 compared with a year earlier. This indicator has been declining for the fourth consecutive quarter. On a quarterly basis, the index also entered the red, reaching 0.6% (the lowest value since the first quarter of 2021). Australia's unemployment rate reached a 2-year high, and has risen to 4.1% (the highest level since January 2022). Employment rose by just 500 persons over the month, below a forecast of 26,000.
The GDP report was also disappointing. GDP figures show Australia's economy grew by just 0.2% in the December quarter, marking the slowest growth rate in the last five quarters. Consumer spending in the fourth quarter increased by 0.1%, while government expenditure slowed from 1.5% to 0.6%. Business investment decreased by 0.2% (after growing by 1.5% in the third quarter). Australian exports dropped 0.3%, while imports fell by 3.4%.
Such results clearly did not contribute to a tightening of the RBA's rhetoric. However, the tone of the accompanying statement and the rhetoric of RBA Governor Michelle Bullock turned out to be softer than the markets' expectations. Therefore, the aussie fell victim to a sell-off.
In the final statement, the central bank noted that price pressures in the country are getting weaker, particularly noticeable in the prices of goods, while prices for services "remain elevated."
But most importantly, the RBA no longer mentioned the possibility of tightening monetary policy. In the text of the previous (February) statement, this phrase was still present ("further tightening in monetary policy may be required").
In other words, the RBA suggested that the next step will likely be a rate cut. The question is when exactly the central bank will take the first step in this direction.
According to the results of a recent survey conducted by Bloomberg agency in early March, the RBA is expected to start lowering the rate in the third quarter of this year, i.e., in August or September (by the way, according to the results of the previous survey, most respondents pointed to the fourth quarter as the most likely target). At the same time, experts expressed confidence that inflation will reach the upper boundary of the RBA's target range (2-3%) in the fourth quarter. That is, respondents expect the RBA to lower the rate even before the CPI reaches the target range.
But more distant dates have also been mentioned. In particular, according to economists at TD Securities, the first round of cuts is likely to take place in November. At the same time, analysts speculated that within the upcoming easing cycle, the RBA would cut the rate by a total of 100 basis points.
Commenting on the outcomes of the RBA's March meeting, Bullock said that the changes in the wording of the accompanying statement was in response to changing inflation data. In regards to the prospects of monetary easing, she said that the central bank needs to be much more confident on inflation coming down to consider a rate cut.
In other words, if reports on CPI continue to reflect a slowdown (especially in the services sector), the likelihood of a rate cut will increase from meeting to meeting. The exclusion of the hawkish phrase from the accompanying statement is just the first step in this direction. But it's a significant one.
Considering the fact that the RBA has only signaled that it is ready to consider rate cuts in the future, Australians will likely move past the March central bank meeting. On Wednesday, AUD/USD traders (as well as other dollar pairs) will focus on the Federal Reserve. The RBA did not support the aussie this time, so the pair can only rise if the US dollar shows weakness, which is actually waiting for the Fed's decision.
Given the high degree of uncertainty, it is advisable to refrain from short positions on the AUD/USD pair and stay out of the market until the outcome of the March Fed meeting is announced. Now, the ball will be in the greenback's court.
