AUD/USD Outlook

The Reserve Bank of Australia (RBA) recently hinted at a possible delay in implementing rate cuts, which led to a notable strengthening of the Australian dollar (AUD) overnight. Despite the RBA's decision to maintain the policy rate at 4.35%, the market was left disappointed as the updated guidance failed to meet expectations for an immediate rate reduction. Within the revised policy statement, while there was mention of potential future rate hikes, there was also a clear indication of a more cautious and dovish monetary policy trajectory ahead. This shift was underscored by the downward revision of inflation forecasts for 2024 and a more conservative outlook on economic growth projections, signalling a prudent stance by the RBA.

Governor Bullock, in emphasizing the importance of incoming data in shaping policy decisions, highlighted the bank's reliance on current economic indicators. As a result, the consensus now suggests that the RBA is unlikely to be among the first G10 central banks to initiate rate cuts in the current fiscal year, with projections leaning towards a potential rate reduction in the third quarter. This anticipation has triggered adjustments within the Australian rate market, where there is now a heightened likelihood of a rate cut in August.In addition to these domestic factors, the Australian dollar has also found support from the rebound observed in the Chinese equity market. Conversely, emerging market currencies have faced headwinds due to the broad-based strength of the US dollar, which has been bolstered by the robust performance of the US economy. The Federal Reserve is anticipated to postpone rate cuts until at least May or June, as policymakers await further clarity on inflation trends before making any adjustments to monetary policy.

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With this in mind we maintain a short AUD/USD position.