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Australian Dollar Slips as RBA Keep Options Open: Pound to AUD Forecast

May 7, 2024 - Written by John Cameron

Tuesday’s RBA meeting was the first central bank meeting of the week, with the BoE due on Thursday.

The RBA were relatively hawkish and hikes are still on the table.

However, the slowing economy makes further tightening unlikely and the Australian Dollar fell following the meeting.

Markets have maintained the bullish momentum set in motion following last week’s dovish FOMC meeting and soft US jobs data. Monday was a strong session for stocks and that has continued on Tuesday with a +0.35% rally in DAX and new all-time highs for the FTSE as it re-opened following the early May holiday break. Meanwhile, the theme in currencies since the FOMC meeting has been US dollar weakness, but that may have run its course as it has stabilized on Tuesday and is pushing slightly higher against the pound and euro. GBPUSD is –0.25% at 1.253 and has slid further than EURUSD which is only lower by –0.1%.

The week ahead is extremely quiet for data in the US, but there will be plenty action elsewhere. The calendar in the UK will be particularly busy with the BoE meeting on Thursday and GDP due on Friday. Will the BoE make any hints at cuts? This will likely decide the fate of the pound for the rest of May but seems unlikely in light of recent comments from Bank of England Chief Economist, Huw Pill. The bank may well stay tight lipped until the data and time is just right.

The RBA meeting on Tuesday may be a guide for what to expect from the BoE later this week. Policy was kept unchanged, but the bank resisted the urge to shift dovish to support the economy. In fact, the tone was relatively hawkish.

RBA Keep Options Open

The cash rate in Australia was kept at a relatively low 4.35% and no new signals on the next move were provided. Clearly, the bank want to keep all avenues open and they repeated that they will rule nothing in or out, i.e. they may cut, hike or simply stay put for an extended period. This is relatively hawkish compared to the likes of the ECB and Fed who have effectively ruled out any further hikes.

However, the market seems to think the RBA is only jawboning. Hikes may be possible but look very improbable and this is reflected in the moves following the meeting. AUDUSD is –0.42% and has dropped through 0.66. The Australian Dollar is the weakest G7 currency this week.

One of the major hurdles to another hike is the softness in the economy and this led to some downgrades in the RBA’s economic forecasts. As Westpac note,

“The near-term growth forecasts have been downgraded, with GDP growth over 2024 now expected to be 1.6%, in line with Westpac’s forecast, rather than 1.8% as in the RBA’s February forecast round; the language in the Statement on Monetary Policy (SMP) is also more downbeat.”

The bank see a weaker outlook for consumption, and while the forecasts are not predicting a recession, 1.6% growth is not something they will be keen on hiking into.

On the hawkish side, the inflation outlook for 2024 was upgraded, and the RBA seem concerned there may be upside surprises. The Governor noted in the conference, he hopes they will not need to raise rates further, but they will act if needed. Inflation is coming down slowly but not nearly as fast as the bank would like and this may mean they will simply hold rates steady rather than hike into a slowing economy. Data will be important over the coming months and the RBA will have their work cut out trying to balance inflation, recession risks and a falling Australian Dollar.
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