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The Reserve Bank of Australia has ended its tightening cycle, but should rates be cut in 2024? Judging by inflation, it should. Judging by the labor market, it is too early for a rate cut. Let’s discuss this topic and make a trading plan for AUDUSD.
Weekly Australian dollar fundamental forecast
Should the RBA diverge from the Fed or continue to follow the US regulator? This is the complex question that central banks are grappling with today. For instance, the Swiss National Bank eased its monetary policy in March, and the ECB is anticipated to cut its interest rate in June. The franc and the euro have borne the brunt, potentially negating disinflation. Conversely, if banks abstain from rate cuts, it could jeopardize the economy. This is a challenging decision, exacerbating the already difficult times for AUDUSD.
The Fed can delay rate cuts as the US economy is robust, while others lack loose fiscal policy, artificial intelligence technology, or rapid productivity growth. In this scenario, following the ECB might seem alluring. How do you choose the lesser of two evils? The answer lies in data analysis!
In this regard, the second Australian solid jobs report reduces the chances of the RBA easing monetary policy and may help the AUDUSD bulls. Employment fell by 6.6k in March, but the rapid growth of 117k in February will offset any weakness. The unemployment rate rose from 3.7% to 3.8%, lower than Bloomberg’s experts’ forecasts. At the same time, the increase in full-time employment by 27.9k makes it doubtful that the labor market is weakening.
Australia’s inflation, unemployment, and wages
Source: Bloomberg.
Based on such statistics, futures shifted the expectations of the cash rate cut to December. The probability of a 25bps cut to 4.1% is estimated at 65%. Capital Economics believes that the RBA will not adjust monetary policy until 2024. According to the company, this would require unemployment to rise to 5%, while the RBA expects the rate to stand at 4.5% by the end of the year.
The central bank is in between a rock an a hard place. At the press conference following the last meeting, RBA head Michele Bullock tried to avoid answering whether monetary tightening was discussed at the meeting. The minutes showed that the subject was off the agenda. Officials have not addressed the issue for the first time since 2022. The cycle of monetary restriction is over, and now we have to puzzle over whether the cash rate will be cut this year. Judging by inflation rates, it will definitely occur this year. Judging by the Australian labor market, it is too early for a rate cut.
Inflation rate in Australia and other countries
Source: Bloomberg.
The AUDUSD may recover on RBA doubts, rising iron ore prices, and the stabilizing Chinese yuan. However, the Fed’s plan to keep the Federal funds rate unchanged is impressing the markets much more than the Aussie’s advantages.
Weekly AUDUSD trading plan
Some bet that the Fed will make more than two rate cuts in 2024. These odds will likely increase and lead to a trend reversal in the US dollar pairs in the second half of the year. The AUDUSD pair may rebound from resistances 0.648 and 0.652 or drop below 0.6435, giving traders solid ground to open short trades.
Price chart of AUDUSD in real time mode
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