{x} | Trading.live

Abstract: In the minutes of the Reserve Bank of Australia's (RBA) August 1 meeting released today, the board members weighed the decision to raise the cash interest rate by 25 basis points or keep it unchanged.

Fundamentals

According to the minutes of the August 1 meeting, the root of the board's inclination to keep interest rates stable lies in their belief that the previous austerity measures are "working as expected". Although the full impact has not yet been shown in the data, there have been important signs, such as "consumption has slowed down significantly", "the labor market may be at a turning point" and "inflation is developing in the right direction".

The Committee observed, "a reliable way to return to the inflation target when the cash interest rate remains at the current level." This assessment seems to be "generally consistent with the central forecast of the staff". Members reiterated their position and agreed that "it is a stronger reason to keep the cash interest rate unchanged at this meeting".

At the same time, they also admitted that "monetary policy may need to be further tightened" to continuously achieve the inflation target. Such decisions will be driven by data trends and ongoing risk assessment.

Market observation: The minutes of the August meeting reiterated the information in the RBA's decision statement and other communications, which indicated that the Board of Directors is now more confident in achieving the inflation target of returning the inflation rate to below 3% by the end of 2025, and is more determined to stay put.

Although data flow and evolution or risks are still important, these are unlikely to constitute sufficient reasons for further interest rate hikes in September. In fact, the unexpectedly weak wage cost index for the June quarter released today may further consolidate the "shelve" position of the board of directors.

The inflation index for July, which is expected to be released at the end of August, may be surprising and may offset some encouraging inflation progress, but even so, some problems may arise, especially in the aspect of rising energy prices, which may lead to inflation. This is considered temporary. The July labor force report, which will be released later this week, may also question the tentative turning point of employment, although the minutes of the meeting seem to imply some patience in this regard.

Overall, data flow is unlikely to provide a convincing reason for raising interest rates at the next meeting of the board of directors on September 5. In addition, the key data will be the June quarterly national accounts data, which will be released one day later. This will include the update of productivity and unit labor cost indicators pointed out by the RBA, which are particularly critical for restoring low inflation in the medium term. But it will also give a clearer picture of the weakness of economic activities-especially consumer spending. As inflation data is expected to slow down further, this combination may rule out the need to raise interest rates further.

We believe that the current cash interest rate of 4.10% will be the peak of the tightening cycle in 2022-2023, and the interest rate trend will be lower in the next step. The interest rate will be cut for the first time in September 2024.

Technical Analysis

The AUDUSD recorded losses for six consecutive sessions and remained in the negative zone on Tuesday. During the European session, the AUDUSD was quoted at 0.6468, down 0.28% overall and at its lowest level since early November 2022.

Technically, the AUDUSD extended yesterday's daily weakness and tested the previous fluctuating lows. As the closing price in the 1D timeframe failed to stand above 0.6500, the current situation of the AUDUSD is still bearish, and it is possible to continue to fall below 0.6500.

A close below the 0.6460 - 0.6455 support zone in the 1D timeframe could see bears quickly push the price below the September 2022 lows near 0.6365 before the market focuses on the late 2022 bottom in the 0.6170 range.

Against the above backdrop and the confirmed bearish "double top" breakout, it suggests that the path of least resistance for the AUDUSD is to the downside. Some follow-up selling below the 0.6460 - 0.6455 support range would reiterate the negative bias and pave the way for a one-month extension of the downtrend. It is recommended to go short at the highs.

Trading Recommendations

Trading direction: Short

Entry price: 0.6480

Target price: 0.6259

Stop loss: 0.6620

Deadline: 2023-08-29 23:55:00

Support: 0.6458, 0.6425, 0.6386, 0.6273

Resistance: 0.6534, 0.6610, 0.6631, 0.6702