The Australian Dollar has come under pressure over the European morning on Tuesday following the May RBA meeting held overnight. As expected, no changes were announced at the meeting with the RBA holding its headline monetary policy unchanged, with a most unchanged policy statement. However, there were some subtle points to note which explain why AUD has been weaker in the wake of the meeting.
Lowe Stresses Caution
On the whole, the message from governor Lowe and the rest of the RBA policymakers today was one of caution. While the bank deems the recovery, both domestic and global, to be making good progress, the bank was keen to note that the “recovery remains uneven”, with some countries struggling to contain the virus. With this in mind, the outlook still contains a great deal of uncertainty and means the bank must move with caution.
Inflation Pickup “Gradual and Modest”
On the domestic level, the RBA noted that Australia’s economic recovery has been stronger than the bank initially projected with employment recovering firmly. However, inflation remains low and despite the pickup in global trade and the lift in commodity prices, the bank expects that subdued inflation is likely to continue for some time. Indeed, while the bank projects that inflation will continue to recover, it expects the trajectory to be “gradual and modest”. Given the firmer upward revisions to inflation we have seen from other central banks, the RBA’s projection that inflation will hit 2% in mid 2023 was a little underwhelming for AUD bulls.
Housing Market on Watch
GDP and employment were both highlighted as areas where the RBA has been impressed and expects continued progress to be made. While the bank also noted that “housing markets have strengthened further”, Lowe cautioned that the “environment of rising house prices and low interest rates” means the RBA will be keeping a close eye on financial conditions and lending standards.
Considering Fresh Bond Purchases
Looking ahead, the RBA noted that it will use the July meeting to decide whether to keep the current April 2024 bond as the target for its 3-year yield curve target or move up to the next maturity of November 2024, extending purchases. However, the RBA noted that it is not considering a change in the 0.10% target range though will be considering a further tranche of bond purchases once the second $100 billion in purchase sis complete.
Mildly AUD Negative
In all it was a fairly subdued meeting and with nothing much for Aussie bulls to latch onto, we’ve seen the Aussie coming off subsequently. On the whole, the bank retains an optimistic outlook though subdued inflation and concerns over the housing market/financial stability are the key takeaways today.
For now, AUDUSD is still sitting at the potential right shoulder of a large head and shoulders pattern, suggesting the potential for a reversal lower. Bears will need to see a break of the .7564 level to open up the path for a deeper correction towards .7413 and beyond. On the other hand, if bulls can break above the .7824 level this will put the focus back on a further push higher.
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