RBA set to hold interest rate as inflation ticks up, labor market remains tight

• The Reserve Bank of Australia is expected to hold the interest rate at 3.60% in September.
• RBA Governor Michele Bullock's press conference and any tweaks to the Monetary Policy Decision Statement will be closely scrutinized.
• The RBA policy announcements could rock the Australian Dollar.

The Reserve Bank of Australia (RBA) is on track to leave the Official Cash Rate (OCR) unchanged at 3.6% after ending its September monetary policy meeting on Tuesday. The decision will be announced at 04:30 GMT.

The Monetary Policy Decision Statement will not be accompanied by the quarterly economic forecasts, but will be followed by RBA Governor Michele Bullock's press conference at 05:30 GMT.

With the rate cut pause widely expected, any tweaks to the Monetary Policy Decision Statement and any surprises offered by Governor Bullock's comments during the press conference could stir the Australian Dollar (AUD).

RBA awaits quarterly CPI before the next interest rate move

Testifying before the House of Representatives Standing Committee on Economics a week ago, RBA Governor Bullock said that she is more confident that inflation will stay in the bank's target of the 2% to 3% band.

"Labour market conditions have eased a little, with unemployment rising slightly, but some tightness remains," Bullock told the Australian parliament.

Bullock clearly downplayed the prospects of a rate cut this week, noting that the "Board will remain attentive to data and the evolving assessment of risks to guide decisions."

Therefore, the RBA is unlikely to act until the release of the quarterly Australian Consumer Price Index (CPI) data due for release on October 29. The inflation report will help determine the central bank's rate move for the November 4 meeting.

On September 24, the Australian Bureau of Statistics (ABS) reported that the monthly CPI rose 3.0% in August from a year earlier, up from 2.8% in July, mostly due to base effects. It came in just above forecasts of 2.9%.

Australian consumer prices rose at the fastest annual pace in a year in August after a hot July, reducing the likelihood of an interest rate cut at its November meeting to 50% from almost 70% before the data.

"Details of the report, mostly in the services sector, suggested some upside risk for third-quarter inflation, which led Barrenjoey, Deutsche Bank, the National Australia Bank, Macquarie and Citi Australia to give up their calls for a rate cut in November," according to Reuters.

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

AUD/USD is holding its recovery momentum from three-week lows of 0.6521 as it heads into the RBA policy announcements on Tuesday.

The language in the Monetary Policy Decision Statement and any hints from RBA Governor Bullock will be key to determining the direction of interest rates and the AUD.

If the central bank sticks to its cautious rhetoric on further easing, while maintaining 'the data-dependent' stance, the AUD could witness a buying resurgence on diminishing odds of a rate cut in November.

On the contrary, if Bullock voices concerns over the economic outlook due to US tariffs as well as over the labor market, investors could perceive the pause as dovish, leaving the door open for a rate reduction in November. In this scenario, Aussie sellers could regain control.

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

"A cautious hold could provide additional legs to the AUD/USD recovery, targeting the previous week's high of 0.6628. The 14-day Relative Strength Index (RSI) is looking to pierce the midline from below, adding credence to the renewed upside in the pair. A sustained move above the 0.6628 barrier could put the 0.6650 psychological level to test."

On the contrary, "AUD/USD could come under fresh selling pressure on a dovish message by the RBA. The pair could retest the three-week trough of 0.6521, where the key 100-day Simple Moving Average (SMA) aligns. A daily candlestick close below that level could initiate a fresh downtrend toward the 0.6450 psychological level, with the last line of defense for buyers seen at the 200-day SMA at 0.6404," Dhwani adds.