Markets Expect an RBA Cut Today
AUD
The Aussie Dollar opens mixed against the majors, moving largely sideways in yesterday’s session ahead of the Reserve Bank of Australia’s interest rate decision this afternoon. The ASX 200 closed -0.2% at 8537 as financials and energy struggled, while Asian equities wrapped up the day uneventfully, Nikkei +0.1%, Shenzhen 300 +0.2% and Hang Seng flat. Gold and Silver were flat, while Iron Ore and Copper fell. The RBA will meet this afternoon and is widely anticipated to deliver its first interest rate cut in four years amid easing inflationary pressures. Following nine consecutive meetings on hold, markets are pricing in a 90% probability that the RBA will reduce the Cash Rate by 25bps to 4.1%. Markets are also pricing in an additional 50bps of easing by the end of 2025. In Q4 2024, headline Australian inflation came in lower than expected, decelerating to 2.4% (from 2.8% in Q3) and marking the lowest quarterly reading since early 2021. The Trimmed Mean figure (the RBA’s preferred inflation gauge) also softened to 3.2%, just outside the 2-3% target band. However, while inflation is trending in the right direction and growth remains subdued - providing some leg room for the RBA to cut today - the central bank’s easing cycle will likely be slow and steady this year, particularly given the tight labour market. Wages are still increasing faster than the RBA would like to see, and the Unemployment Rate remains at a stubbornly low 4.0%, adding to the argument for another interest rate pause later today (which would see the Aussie Dollar strengthen given 90% expectations of a cut).
USD
AUDUSD touched 2-month highs of 0.6372 in yesterday’s session, falling off a little at this morning’s open to kick off the day at 0.6355. A quiet session for financial markets with the U.S. equity and bond markets closed for the Presidents Day holiday. The Federal Reserve’s Harker spoke overnight, indicating he saw no reason for the Fed to change interest rate policy right now as the central bank continued to work to lower inflation levels. Tonight, we’ll see the Empire State Manufacturing Index. Tomorrow afternoon, President Trump is set to join Elon Musk in an interview conducted by Fox News, representing an opportunity for USD volatility depending on the course of discussion. The heavy-hitting US data will kick off in the back half of the week – FOMC Meeting Minutes, Unemployment Claims and Flash PMIs.
EUR
AUDEUR touched 6-day highs of 0.6080 yesterday before retreating a tad to open at 0.6065. The DAX gained 1.3% and the CAC edged 0.1% higher. Little Eurozone data so far this week. Tonight we have German ZEW Economic Sentiment. Focus will be on Friday’s Flash PMIs as well as the run-up to the weekend elections in Germany, where a very tight result and a delay in forming a coalition would likely be seen as Euro-negative given the lack of leadership in Europe currently.
GBP
Pound strength has seen AUDGBP fall 0.5% from yesterday’s highs of 0.5060, starting the day at 0.5036. The FTSE ended yesterday +0.4%. Away from the politics of US foreign policy, the Pound’s focus this week will be on UK jobs data (tonight), a speech from the Bank of England’s Governor Bailey (tonight) and CPI (tomorrow). The Unemployment Rate is expected to tick higher to 4.5% and wage growth (including bonuses) is expected to rise 5.9% in the three months to December, up from the previous release of 5.6%, further fueling inflation.
NZD
AUDNZD climbed to 1.1101 highs last night before falling off to open today at 1.1082 in line with yesterday morning. Tomorrow, the Reserve Bank of New Zealand is set to deliver it third consecutive half-point interest rate cut to revive the Kiwi economy. This would take the Official Cash Rate to 3.75%. At the RBNZ’s final meeting of 2024, Governor Orr said policymakers expect to lower the rate by 50bps in February, followed by cuts of that magnitude in October and November, provided the economy evolves as anticipated.