The Australian Dollar (AUD) continued its decline against the US Dollar (USD) on Monday as markets brace for the Reserve Bank of Australia (RBA) decision. The RBA is facing pressure due to high inflation, which may limit the extent of rate cuts despite signs of economic weakness. The meeting on Tuesday is eagerly awaited by investors, with the first rate cut not expected until May 2025. While the Australian economy has not shown significant highlights, the RBA is anticipated to maintain rates at 4.35% and stick to a neutral policy stance.
Technical analysis indicates negative momentum for the AUD/USD pair, with the Relative Strength Index (RSI) pointing downwards and the Moving Average Convergence Divergence (MACD) showing persistent selling pressure. The short-term outlook has turned negative as the pair falls below the 20-day Simple Moving Average (SMA), with potential retests of the convergence of the 100 and 200-day SMAs at 0.6560-0.6550. The market is also awaiting the outcome of the RBA meeting for further guidance on interest rate movements.
The RBA, in its role of setting interest rates and managing monetary policy for Australia, aims to maintain price stability along with other economic objectives. Decisions are made by a board of governors at regular meetings throughout the year. High interest rates are expected to strengthen the AUD, while accommodative policies like quantitative easing can lead to a weaker currency. Macroeconomic data, such as GDP figures and employment reports, can influence the value of the AUD, with a strong economy potentially leading to higher interest rates in support of the currency.
Inflation, which historically has been viewed as a negative factor for currencies, can actually have a positive impact in modern times due to the influence of global capital flows. Higher inflation can lead central banks to raise interest rates, attracting more capital inflows and boosting demand for the local currency. Additionally, tools like quantitative easing and tightening can be employed by the RBA in response to economic conditions. Quantitative easing involves the creation of currencies to purchase assets, while quantitative tightening is implemented to reduce liquidity in an economy undergoing recovery.
As the AUD/USD pair continues its downward trend, market participants are closely watching the RBA’s decision on interest rates for any indications of future policy directions. The diverging expectations between markets and the Federal Reserve regarding rate cuts further add to the uncertainty surrounding the AUD’s performance. With technical indicators pointing to persistent selling pressure on the pair, the outcome of the RBA meeting on Tuesday will provide crucial insights into the future trajectory of the Australian Dollar against the US Dollar.
