AUD/USD Falls after the Reserve Bank of Australia Kept Rates Unchanged Again

AUD/USD Analysis

The Reserve Bank of Australia (RBA) stayed on the sidelines again, keeping rates at 4.1% and the highest in eleven years ^[1]. This was the second straight pause and third in this tightening cycle that started in May 2022 and has produced 400 basis points of hikes.

Although there was some uncertainty around the outcome going into the meeting, the hold was hardly a surprise. The most recent CPI report last week, showed that headline inflation eased further in Q2, to 6% y/y and the lowest in almost two years. This gave policymakers room to stand pat, in order to assess the outlook and the impact of their actions.

There is just one more meeting ahead under incumbent Governor Lowe and given the progress on inflation, another pause in September seems increasingly reasonable. On the other hand, officials kept the door open to more policy firming. Inflation is far from the 2-3% target and the bank does not expect it to fall within that range before late-2025. More to it, the labor market remains "very tight", despite some easing, calling for sustained restrictive stance.

AUD/USD fall after today's decision, as the RBA held rates unchanged. This makes the pair vulnerable to 0.6563, although strong catalyst would be needed for a sub-0.6456 moves. On the other hand, AUD/USD has shown resilience to the less aggressive RBA lately and another effort towards 0.6900 would not be surprising, but we struggle to see further strength towards and beyond 0.7000.

The pair comes from a somwhat mixed July, during which it lacked firm direction, in spite of the gains. Direction may continue to be elusive, given the uncertain policy outlook. This is the case not only for the RBA, but for most major central banks, including the US Fed. Chair Powell refrained from offering guidance after last week's rate increase, saying that both a pause and a hike are possible, while markets believe that rates have reached the terminal level.