AUD/USD hits one-month high, RBA decision next

The Australian dollar has started the week with modest gains. AUD/USD is up 0.25%, trading at 0.6624 in the European session at the time of writing. The Aussie is coming off a strong week, having gained 1.19%.

RBA widely expected to pause

The Reserve Bank of Australia meets on Tuesday and is widely expected to hold the cash rate at 4.35%, a 12-year high. The central bank has maintained rates three straight times and there is a strong likelihood that the rate statement will be hawkish, as inflation in the first quarter dropped from 4.1% to 3.6% but was above the market estimate of 3.4%.

Inflation has come down significantly but remains sticky as the RBA tries to bring it back down to the 2%-3% target range. The RBA is making its rate decisions based on the data and that has the markets guessing as to what the rate path will look like. A rate cut isn’t coming until inflation falls and the RBA doesn’t expect inflation to fall within the target range before 2025.

If inflation resumes its downward path in the next few months we could see a rate cut in November but at the same time, the risk of a rate hike has increased since the Q1 inflation report. As well, the job market has been tighter than anticipated, which makes it more difficult to lower rates. The RBA was very late in starting its rate-tightening cycle and policy makers will be very hesitant to lower rates until they are confident that inflation won’t rebound.

US nonfarm payrolls lower than expected

US nonfarm payrolls eased to 175,000 in April, well below the market estimate of 240,000. The unemployment rate rose from 3.8% to 3.9%, above the forecast of 3.8%. Wage growth rose 0.2% m/m, lower than the 0.3% gain in March and shy of the market estimate of 0.2%. We haven’t seen all three components of the employment report miss their estimates for quite some time, which could point to cracks in the US labor market.

AUD/USD Technical

• AUD/USD tested support at 0.6606 earlier. Below, there is support at 0.6564
• 0.6651 and 0.6693 are the next resistance lines

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