RBA Set to Hold Rates at 4.35% Through 2024 as Core Inflation Stays High

Australia's Reserve Bank (RBA) is set to hold its interest rate at 4.35% through the end of 2023, as forecasted by economists in a Reuters poll. Although consumer price inflation has eased to 2.8% in the last quarter—bringing it within the RBA's 2-3% target range for the first time since 2021—core inflation, which excludes volatile items like fuel and electricity, remains elevated at 3.5%. This persistent core inflation, alongside robust economic activity, supports the RBA’s cautious approach.

Australia’s job market has stayed resilient, with the unemployment rate stable between 4.0% and 4.2% since April. This steady employment trend has allowed the RBA to maintain its rate-hiking strategy at a lower peak than some global counterparts. Market analysts believe this, combined with continued core inflation concerns, makes the RBA less likely to cut rates in the near term compared to other central banks, particularly in developed nations. Major banks, including ANZ, CBA, NAB, and Westpac, all project rate cuts to begin at the RBA’s first meeting of 2025, with 70% of surveyed respondents anticipating a 25-basis-point reduction to 4.10%.

Economists anticipate that rates will decrease by a total of 75 basis points in 2025, settling at 3.60%, while the U.S. Federal Reserve is expected to cut rates by up to 225 basis points. This relative difference suggests the Australian dollar will likely regain value against the U.S. dollar, possibly reversing its year-to-date 3.5% loss by early next year.

Financially, the RBA has reported a fourth consecutive year of losses due to pandemic-era interventions, resulting in a cumulative negative equity position of A$20.4 billion as of June 30. The A$4.2 billion loss in 2024 was driven by the low interest earned on its bond portfolio compared to the higher payouts to commercial bank depositors. While this negative equity has no direct impact on the RBA’s monetary policy, Governor Michele Bullock has emphasized the importance of restoring the bank's capital over time, with the Treasurer’s support to retain future profits to rebuild this capital.

The U.S. dollar declined slightly, and U.S. data pointed to easing inflation pressures. This trend supports expectations that the Federal Reserve will reduce interest rates by 25 basis points at its upcoming meeting. Data revealed that U.S. consumer spending rose slightly more than expected in September, setting a robust economic pace for Q4.

The Fed's preferred inflation metric, the personal consumption expenditures (PCE) index, showed a modest 0.2% increase month-over-month in September, down from August’s 2.3% year-on-year rate to 2.1% in September. Core PCE, excluding food and energy, rose 0.3% from August to September, holding at 2.7% year-over-year, just above the Fed’s 2% target. Investors now see a high probability (94.7%) of another 25-basis-point cut next week.

Meanwhile, unemployment claims fell to 216,000, and private payrolls showed surprising growth, indicating a resilient labor market. Analysts attribute the dollar’s recent strength to solid U.S. economic data and speculation over the upcoming U.S. presidential election, with polls indicating a close race between Democratic Vice President Kamala Harris and Republican candidate Donald Trump.

Data for Technical Analysis (1H) CFD AUD/USD

Resistance : 0.6582, 0.6585, 0.6589

Support : 0.6572, 0.6569, 0.6565

1H Outlook    

Source: TradingView

Buy/Long 1 If the support at the price range 0.6567 - 0.6572 is touched, but the support at 0.6572 cannot be broken, the TP may be set around 0.6583 and the SL around 0.6565, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 0.6582 - 0.6587, TP may be set around 0.6595 and SL around 0.6570, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 0.6582 - 0.6587 is touched, but the resistance at 0.6582 cannot be broken, the TP may be set around 0.6571 and the SL around 0.6589, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 0.6567 - 0.6572, TP may be set around 0.6558 and SL around 0.6584, or up to the risk appetite.       

Pivot Points Nov 1, 2024 02:48AM GMT