RBA expected to cut interest rate as inflation cools, unemployment rises

• The Reserve Bank of Australia is expected to lower the interest rate by 25 basis points to 3.60% in August.
• The focus will be on RBA Governor Michele Bullock's press conference and updated economic forecasts.
• The Australian Dollar braces for a big reaction to the RBA policy announcements.

The Reserve Bank of Australia (RBA) is expected to announce a 25 basis points (bps) cut to the Official Cash Rate (OCR) to 3.6% from 3.85% following the conclusion of its August monetary policy meeting on Tuesday. The decision will be announced at 04:30 GMT.

The Monetary Policy Statement will be accompanied by the quarterly economic forecasts. RBA Governor Michele Bullock's press conference will follow at 05:30 GMT.

As the rate cut is fully baked in, the Australian Dollar (AUD) braces for intense volatility on any surprises offered by the central bank's updated projections or Governor Bullock's comments during the press conference.

RBA set to lower interest rate, what's next?

Following the surprise interest rate hold in July, in a rare split decision of six to three, the Reserve Bank of Australia now seems on a clear path to lower the OCR on Tuesday as inflation has recently slowed more-than-expected and the Unemployment Rate has hit a three-and-a-half-year high.

The Minutes of the RBA's July meeting showed that the majority of the board wanted to wait for more information, including quarterly price data, to confirm inflation was slowing.

The headline Consumer Price Index rose 0.7% in the second quarter compared with the previous three-month period, nudging the annual pace down to 2.1% from 2.4%, registering the lowest reading in more than four years and approaching the lower bound of the central bank's 2% to 3% inflation target.

Meanwhile, the Unemployment Rate rose to 4.3% in June, up from 4.1% in May, according to the Australian Bureau of Statistics (ABS) data. Other details of the jobs report showed that employment increased by 2,000 people in June, but the number of officially unemployed people jumped by 33,600.

Markets predict the RBA to continue cutting its benchmark rate to 3.10% or lower by early next year.

However, the updated economic projections and/or the vote split could offer fresh surprises on the central bank's path forward on rates.

Uncertainty in the RBA's communication remains high after the April shake-up that shifted rate-setting power entirely to a new nine-member Monetary Policy Board (MPB).

The changes to the MPB resulted in the July surprise outcome, shocking markets.

How will the Reserve Bank of Australia's decision impact AUD/USD?

Speaking at the press conference after the July policy decision, RBA Governor Michele Bullock explained that the bank could no longer offer guidance because the rate decision was up to the board alone and it could not be pre-empted.

However, Bullock did note that markets "can expect rates to decline if inflation slows as expected" and that the policy decision "will be based on our forecasts of future inflation."

Therefore, if the central bank lowers its inflation and growth forecasts, it could ramp up the odds of further rate cuts, fuelling a fresh downtrend in the AUD.

On the contrary, if Bullock downplays risks to the economy due to US tariffs and reiterates that "a measured, gradual approach to monetary policy easing is appropriate," Aussie buyers could regain control.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights key technical indicators for trading AUD/USD following the policy announcement.

"AUD/USD is seeing increased downside risks heading into the RBA showdown, having faced rejection near the 0.6550 level on several occasions. Adding credence to the bearish potential, the 21-day Simple Moving Average (SMA) has cut the 50-day SMA from above, confirming a Bear Cross on the daily chart. Still, the 14-day Relative Strength Index (RSI) remains above the midline."

"A dovish cut by the RBA could reinforce the selling interest, sending AUD/USD to challenge the August 5 low of 0.6450, where the 100-day SMA closes in. Failure to resist above that level could threaten the August low of 0.6419, below which the 0.6350 psychological barrier will come into play. Conversely, buyers need a decisive break above the 0.6550 threshold to revive the recovery toward the 0.6600 mark. The next topside target is aligned at the July 24 high of 0.6625," Dhwani adds.