RBA Poised to Reduce Cash Rate by 25 Basis Points

The Reserve
Bank of Australia (RBA) will meet this Tuesday and is widely
anticipated to deliver its first rate cut in four years amid easing
inflationary pressures. I am ‘reasonably’ convinced that the central bank will
reduce the Cash Rate this week, a belief based on inflation and growth data that
delivered prints south of the RBA’s recent projections (released on 5 November
2024).

Following nine
consecutive meetings on hold, markets are pricing in a 90% probability that the
RBA will reduce the Cash Rate by 25 basis points (bps) to 4.10% from 4.35% (per
the ASX 30-Day Interbank Cash Rate futures). Markets are also pricing for an additional 50 bps of cuts by the year-end,
lowering the Cash Rate to 3.6%.

I am not
holding my breath for anything illuminating to come out of the RBA’s
accompanying rate statement and press conference. I believe we will see the
Board underscore a cautious tone, echoing the ‘data dependent’ approach. The
central bank will likely shine the spotlight on the disinflation progress but stop
short of providing anything concrete to signal further cuts.

The RBA will
also release their detailed quarterly updated forecasts on growth (GDP
[Gross Domestic Product]), unemployment, inflation, and the Cash Rate. Traders
will look at these metrics closely for any revisions. I expect slightly lower
revisions to GDP and inflation, but I do not see much change in forecasts for
the Cash Rate.

Inflation and GDP: Main Drivers Behind a Rate Cut

In Q2 24,
headline Australian inflation came in lower than expected, decelerating to 2.4%
(from 2.8% in Q3 24) and marking the lowest quarterly reading since early 2021.
This not only places headline inflation within the lower boundary of the RBA’s
inflation target band of 2-3%, but the trimmed mean inflation rate – the RBA’s
preferred measure of underlying inflation – also exhibited signs of softness, cooling
to within touching distance of the RBA’s upper target band (3.0%) at 3.2% in Q4
24 (year-on-year [YY]) from 3.5% in Q3 24.

GDP cooled to
0.8% in Q3 24 (YY), down from 1.0% in Q2 24 and marked the slowest pace of
economic growth since late 2020. Quarterly (Q3 24), GDP grew by 0.3%, following
a slight increase of 0.2% in the previous quarter (Q2 24).

However, while
inflation is trending in the right direction and growth remains subdued – providing
some legroom for the RBA to cut the Cash Rate this week – the central bank’s
easing cycle will likely be slow and steady this year. Coupled with underlying
inflation trending just north of the RBA’s inflation target, the central bank still
faces a reasonably solid jobs market. Employment increased by 56,300,
comfortably surpassing the market’s median estimate of 15,000 and was above
November’s revised reading of 28,200, and wage growth remains steady.

AUD/USD Shaking Hands with Resistance

The AUD/USD
currency pair (Australian dollar versus the US dollar) finished last week locking
horns with daily resistance between US$0.6417 and US$0.6364 (this area
comprises several ratios [including Fibonacci ratios], a horizontal resistance
level, and an ascending resistance extended from US$0.6170).

What is also
interesting is the approach to the above-noted resistance could prompt sellers
to enter the fray this week. Following a lower low of US$0.6088 in early
February, this likely encouraged breakout selling. With these orders now
flushed out of the market (bear trap) and the recent higher high (US$0.6368)
potentially exciting buyers, this, coupled with price testing resistance last
week, could be a bull trap in the making to push things lower.