AUD/USD Base Interest Rate Pauses Ahead of RBA Decision

On Tuesday, the upcoming meeting of the Reserve Bank of Australia (RBA) will determine whether to proceed with a third consecutive rate hike or opt for a pause. The market sentiment has shifted. Traders now assign a 52% probability of a pause, contrasting the previous 70% likelihood observed just a week ago. The decrease in inflation from 6.8% to 5.6% has added to the uncertainty surrounding the benchmark interest rate. Yet, the RBA aims for a faster decline in inflation, as it remains triple the targeted rate of 2%. Additional rate hikes could lower inflation but carry the risk of tipping the economy into a recession.

Stronger US Dollar and Interest Rate and Inflation Concerns

Despite indications of a slowdown in the Australian economy, the labour market remains robust, and consumer spending has demonstrated resilience in the face of elevated inflation. Retail sales for May exceeded expectations, rising 0.7% month-on-month. RBA members in favour of a hike may point to these positive economic indicators as reasons to proceed with additional rate increases.

The RBA’s minutes from previous meetings offer some guidance on the central bank’s rate policy plans. April and May’s minutes were hawkish, leading to rate hikes. Hence, the June minutes had a more dovish tone, which led to a decline in the Australian dollar. Traders are now eager to see if the upcoming minutes signal a pause in the current rate hike cycle.

Market Uncertainty Prevails

In the United States, the PCE Price Index, the Federal Reserve’s base interest rate indicator, rose 0.1% month-on-month in June. This indicated ongoing disinflation. As a result, the probability of a July rate hike has increased to 88%, raising the likelihood of a strengthening US dollar, which may further impact the AUD/USD pair.

Despite facing headwinds from a stronger US dollar and concerns about a global economic downturn, the AUD/USD pair has managed to hold above the mid-0.6600s range. Investors are closely monitoring the RBA’s decision and this week’s key US macroeconomic data. Those include the ISM Manufacturing PMI, the FOMC meeting minutes, and the highly anticipated NFP report. These events could provide fresh directional impetus to the AUD/USD pair as market sentiment evolves.

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