Date: 06 May 2019

The Reserve Bank of Australia interest rate decision is set to be one of the most anticipated market events this week, with many traders and investors betting that the Reserve Bank of Australia will be the first major central bank to reduce its interest rate amidst an ongoing slowdown in the Australian economy.

Following much weaker than expected inflation data for the first three months of this year and an uptick in the official Australian unemployment rate last month, the Reserve Bank of Australia is widely tipped to reduce the nations interest rate from 1.50 percent to at least 1.25 percent on Tuesday.

The Reserve Bank of Australia has kept interest rates on hold for thirty-two consecutive months and have remained fairly neutral as policymakers, giving the Australian economy plenty of room to adjust to the changing global economic climate. However, the Australian first-quarter inflation number was the weakest since 2003, which is why many economists expect that the RBA will be jolted into action tomorrow.

The RBA will become the first major central bank to cut rates this year if it does reduce its interest rate as expected on Tuesday. When central banks cut interest rates, it is hoped that it will help to lower overall borrowing costs, which in turn encourages consumers to spend and therefore stoke inflationary pressures inside the economy.

The Reserve Bank of New Zealand will also hold a meeting this week to decide on interest rates, with many analysts now speculating that the central bank of New Zealand may be forced to lower interest rates during the second half of this year, following a series of economic data misses during the first quarter of 2019.

The reaction of the Australian Dollar may also be of great interest to traders, as a rate cut may not yet have been fully priced into the AUD/USD and AUD/JPY pairs. The AUD/JPY pair is extremely sensitive to rate changes and is often seen as a proxy for risk-sentiment in the foreign exchange market.

If the Reserve Bank of Australia fails to cut interest rates this week, it is expected that Australian policymakers will at very least elude to the timing of a rate cut, with all indications then pointing to a rate cut coming as early as the next policy meeting in June.

 

AUD/USD Daily Mountain Chart      Source ActivTrader Platform

AUD/USD Daily Mountain Chart | Source: ActivTrader Platform

 

The AUD/USD pair enjoyed strong gains after the Non-farm jobs report, after coming under pressure earlier last week following slightly weaker than expected data from the Chinese economy. The move higher is likely to be short-lived if the RBA cut rates, with the 0.6930 and 0.6880 the key downside levels to watch if traders start to sell the Australian Dollar below the 0.6980 level this week.

 

Written by Nathan Batchelor, External Analyst, ActivTrades

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