AUD/USD retreats as RBA delivers expected rate cut, signals limited easing ahead

• The RBA cuts its Official Cash Rate by 25 bps, citing fading upside inflation risks and global headwinds.
• The Australian Dollar is pressured further by domestic political rift and China's latest PBoC rate cut.
• RBA Governor Bullock signals flexibility but downplays prospects of an extended easing cycle.

The Australian Dollar (AUD) inches lower to 0.6415 against the US Dollar (USD) on Tuesday, attempting to stabilize near the previous day's low. The Aussie came under renewed pressure after the Reserve Bank of Australia (RBA) lowered its benchmark interest rate by 25 basis points, from 4.10% to 3.85%, the lowest level since 2023. The move was widely anticipated by financial markets, with major banks including Westpac and Commonwealth Bank of Australia (CBA) pricing in a quarter-point cut ahead of the meeting.

AUD/USD slipped around 0.65% to 0.6408 following the decision, reversing Monday's modest gains. Political instability added to the bearish tone after the National Party withdrew support from Australia's opposition coalition. Additionally, sentiment around the Aussie soured on the back of a fresh rate cut by the People's Bank of China (PBoC), which fueled growth concerns in Australia's top trading partner.

The RBA noted in its policy statement that the upside risks to inflation have eased, with recent data showing a continued slowdown in price pressures. "Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance," Governor Michele Bullock noted. 

Striking a more measured tone compared to February's hawkish stance, Bullock acknowledged that the global context has shifted for the worse, citing US President Donald Trump's April 2 tariff announcement and ongoing uncertainty around the international outlook. Speaking to reporters after the decision, she said the board had considered both holding rates steady and a larger 50 basis point cut, but ultimately opted for a cautious 25 bps move.

"Does it mean we're headed into a long series of interest rate cuts? I don't know at this point... that's why I think the cautious 25-basis-point cut with a recognition that if we need to move quickly, we can. We have got space," she added.

Still, the Aussie found some support from a broadly weaker US Dollar. The US Dollar Index (DXY) extended its losing streak to trade near the 100.00 mark on Tuesday as USD bulls remain sidelined after Moody's downgraded the US credit rating to Aa1, citing rising debt levels and widening fiscal deficits. Also, growing concerns over the US fiscal outlook following President Donald Trump's approval of new tax cuts without offsetting spending reductions continue to pressure the Greenback.