AUD/USD hits nine-week peak ahead of RBA meeting

AUD/USD outlook: RBA rate decision in focus

The AUD/USD finished higher last week at 0.6351 (1.26%), marking its highest close in almost nine weeks. The rally was primarily driven by three factors that pressured the US dollar against most G10 currencies.

Tariff developments ease pressure

The first is that after US President Donald Trump promised tariffs would come into effect on Day 1, there has been a stream of more positive tariff news since the January 20 inauguration. Only a 25% tariff on steel and aluminium imports and a 10% tariff on all Chinese imports have been enacted. Tariffs on Mexico and Canada were announced but postponed for a month, while reciprocal tariffs were delayed until April 1.

The short-term respite should not be interpreted as the end of the tariff threat. Tariffs are still very much on the Trump agenda, and if we look back to the 2018 playbook, the trade war evolved over an 18-month period. Higher tariffs on Chinese imports, tariffs on European auto imports, and reciprocal tariffs are likely to follow. However, for now, the tariff storm clouds have parted.

Geopolitical developments

Secondly, there is optimism for a ceasefire in Ukraine following US-Russia talks. Although Ukrainian President Zelenskyy's and EU leaders' reactions to the talks have been cool, a future peace agreement could boost European economic growth through Ukraine's rebuilding efforts.

US economic data supports rate cut expectations

Lastly, weaker US retail sales and a cooler-than-expected core PPI reading last week helped ease inflation concerns, leading the US rates market to move back towards two Fed rate cuts in 2025 instead of one, further supporting the AUD/USD.

This week, the drivers of the AUD/USD will have a more domestic focus in the shape of tomorrow's RBA Board meeting, previewed below and Thursday's labour force update for January.

RBA interest rate decision

Tuesday, 18 February at 2.30pm (AEDT)

At its December meeting, the Reserve Bank of Australia (RBA) kept its official cash rate on hold at 4.35% for the ninth consecutive meeting. A dovish shift in tone was noted in the statement that accompanied the "on hold" decision.

"Wage pressures have eased more than expected in the November SMP," and "some of the upside risks to inflation appear to have eased."

The minutes from the December board meeting confirmed the RBA’s dovish pivot.

"If the future flow of data continued to evolve in line with, or weaker than, their expectations, it would further increase their confidence that inflation was declining sustainably towards target. If that were to occur, members concluded that it would, in due course, be appropriate to begin relaxing the degree of monetary policy tightness."

A cooler Q4 inflation update released in late January increased confidence that inflation was on track to return sustainably to target and that the RBA is in a position to ease monetary policy.

Headline inflation rose by 0.2% in Q4, allowing the annual rate of headline inflation to ease to 2.4% from 2.8%. The RBA’s preferred measure of inflation, the trimmed mean, rose by 0.5% quarter-on-quarter (QoQ), allowing the annual rate of core inflation to fall to 3.2% from 3.6% prior. Annualised over the past six months, the core inflation rate fell to 2.7%.

Following the RBA’s dovish pivot and a cooler Q4 inflation reading amid sluggish growth, it is widely anticipated that the Reserve Bank of Australia will reduce the cash rate by 25 basis points (bp) to 4.10% at this week’s board meeting. This would mark the RBA's first rate cut since November 2020. A second 25 bp rate cut is fully priced for May, with a cumulative 75 bp of RBA rate cuts priced for 2025.

The RBA’s updated forecasts are expected to revise lower near-term inflation and GDP forecasts before a recovery in GDP as real disposable incomes begin to rise and inflation decreases. The RBA’s forward guidance is expected to sound cautious and note that future cuts will be data-dependent.

RBA cash rate chart

AUD/USD technical analysis

From its late September 2024 high of 0.6942 to the early February low of 0.6087, the AUD/USD fell by a jaw-dropping ~12.2% in just four months. The AUD/USD has since commenced a counter-trend rally, breaking above downtrend resistance from the 0.6942 high to be chopping into a solid band of resistance in the 0.6350/0.6370 area.

If the AUD/USD can see a sustained break above the 0.6350/0.6370 area after tomorrow's RBA meeting, it opens the way for the rally to extend towards the 200-day moving average (MA) at 0.6560. However, while the AUD/USD fails to cement a foothold above the 0.6350/0.6370 resistance zone, a retest and break of the 0.6087 low is possible.

AUD/USD daily chart

• _{Source: TradingView. The figures stated are as of 17 February 2025. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}