How the RBA Interest Rate Decision Could Affect the AUDUSD

Summary:

The AUDUSD pair is under focus as the Reserve Bank of Australia (RBA) prepares to release the interest rate decisions and statement from its Aug meeting.

On Tuesday, August 4 at 4.30 am GMT, the Reserve Bank of Australia (RBA) is expected to release its interest rate decision and the accompanying statement. The market consensus is for the RBA to keep interest rates unchanged at 0.25%.

The RBA has reacted to the coronavirus pandemic through a variety of tools. In addition to cutting rates to a self-imposed floor of 0.25%, it has also kept open the options of asset purchases, applying yield curve control by setting the target rates for government bonds at 0.25% and also providing a lending window for banks at 0.25%. The RBA has indicated it intends to maintain the interest rate floor until 2023.

Traders will scrutinize the statement for the RBA’s economic forecasts for GDP and employment and how these new forecasts have matched or deviated from previous ones in the light of the recent coronavirus resurgence in the country and the 6-week Melbourne lockdown.
The AUDUSD continues to trade at close to the 2020 highs it posted last week. The pair is not likely to experience significant movement if the RBA sticks to the script of the previous meeting.

It must be noted that the RBA has not performed market operations in three months, and it seems to want to increasingly step back from taking the lead role in fixing the economic situation. Governor Lowe has warned in recent speeches that monetary policy alone could not achieve more, and also spoke of fiscal authorities stepping up to provide a recovery bridge.

Outlook for the AUDUSD

Strength of the Aussie Dollar could start to become an issue, as it makes Australia’s exports more expensive.
If the RBA raises concerns about this, or downgrades its expectations for recovery of the employment market, we could see a selloff on the AUDUSD, which continues the correction from recent highs. Such a response would target 0.70595 initially, with a real possibility of extension towards 0.70003 and 0.69160.
A more positive outlook from the RBA may be enough to allow the pair to gain access to 0.72043 or possibly 0.72977 and 0.73831.