Australian interest rates are expected to remain unchanged in August.

A speech by Reserve Bank of Australia Governor Michele Bullock may shed delicate on the board’s path forward.

Australian dollar under pressure ahead of verdict.

The Reserve Bank of Australia (RBA) will announce its monetary policy decision on Tuesday, August 6. The central bank is expected to keep the Official Rate of Rate (OCR) unchanged at 4.35% in the face of persistently high inflation. Governor Michele Bullock will hold a press conference following the announcement, where she is likely to explain the reasons behind the decision and, hopefully, provide some guidance on what policymakers might do next.

Ahead of the announcement, the Australian dollar (AUD) is under powerful selling pressure amid risk aversion. Financial markets are now focused on central banks, with rising hopes that the US Federal Reserve (Fed) will start easing monetary policy as early as September. Furthermore, market participants are pricing in the US central bank starting a modern cycle by cutting interest rates by 50 basis points (bps).

The Reserve Bank of Australia is expected to extend the break, but what next?

But the concerns aren’t confined to the Fed. The Bank of Japan (BoJ) is also in the spotlight as policymakers finally move toward more aggressive tightening. The BOJ decided to raise its short-term target rate by 15 basis points to 0.15%-0.25% when it met last week, also announcing that it would cut its monthly bond purchases by about 400 billion yen each quarter. The decision came after the Japanese yen (JPY) fell to multi-year lows against the U.S. dollar and was clearly a decision to support the local currency, rather than an inflation-related measure.

Back at the RBA, policymakers are likely to debate holding or raising rates, with a rate cut unlikely to be on the table. When the board met last June, it noted that the case for a rate hike “could be further strengthened” if supply in the economy “is likely to be more constrained than assumed,” and given that “productivity growth has remained very weak.”

Australia released its inflation figures last week, and the news was far from good. According to the Australian Bureau of Statistics (ABS), the Consumer Price Index (CPI) rose by 1.0% in the second quarter of the year and by 3.8% in the twelve months to the June quarter of 2024. The latter result was in line with market expectations, but higher than the 3.6% recorded in the first quarter of the year.

Meanwhile, the RBA Trimmed Mean CPI, the central bank’s favourite inflation gauge, rose 0.8% QoQ and 3.9% year-on-year in the three months to June, slightly below expectations. Finally, monthly CPI rose 3.8% year-on-year in June, below the previous 4% but still above the RBA’s target of 2%-3%.

Inflation in Australia has not yet reached a level that would justify an interest rate hike, but given the latest data, the chances of a rate cut are virtually zero.

How will the RBA interest rate decision affect the AUD/USD pair?

Ahead of the announcement, market participants are expecting a hawkish hold. Policymakers are likely to keep the OCR at 4.35% for a sixth straight meeting on Tuesday and refrain from discussing rate cuts, but instead maintain their focus on persistent inflationary pressures and leave the door open for a potential hike.

Governor Michele Bullock and company are likely to reiterate that they need to be confident that price growth is sustainably trending toward the central bank’s inflation target and that they are not ruling anything out or out of the question in such a scenario.

If so, AUD could find strength in the near term, although it should be short-lived given the risk-averse environment and the decision is in line with expectations. A dovish stance would be a gigantic surprise though and could trigger a massive sell-off of Australian currencies.

The AUD/USD pair is hovering around the 0.6450 level ahead of the event, having fallen to 0.6347 earlier in the week on rising tensions in the Middle East and central bank imbalances.

Valeria Bednarik, Chief Analyst at FXStreet, says, “The AUD/USD pair is extremely oversold but there are no technical signs of exhaustion on the downside. However, a cumulative decline of 350 pips and expected hawkish hold from the RBA could help the pair correct higher. The immediate resistance level is the 0.6500-0.6520 price zone and gains beyond it are unlikely unless there is a hawkish surprise. In such a scenario, AUD/USD could surge towards 0.6570.”

Bednarik added: “A breakout of the 0.6400 level should lead to a retest of the aforementioned low at 0.6347, furthermore, if risk aversion continues to dominate financial markets ahead of the announcement. A test of the 0.6300 level is in the cards if the latter gives up.”