RBA set to hike interest rate to 4.60% in September as inflation remains elevated

• The Reserve Bank of Australia is set to raise the interest rate to 4.60% in September.

• RBA Governor Bullock’s words and the policy statement are in focus for cues on further rate hikes.

• The Australian Dollar is expected to experience heightened volatility around the RBA event risk.

The Reserve Bank of Australia (RBA) is widely expected to raise the Official Cash Rate (OCR) by 25 basis points (bps) to 4.60% from 4.35% on Tuesday, after keeping rates unchanged at its previous two meetings

The decision will be announced at 04:30 GMT, accompanied by the Monetary Policy Statement (MPS), and followed by RBA Governor Michele Bullock’s press conference at 05:30 GMT.

The Australian Dollar (AUD) braces for a big reaction to the RBA policy announcement and Bullock’s press conference, as underlying inflation remains elevated while labor market conditions are easing.  

Focus on RBA Governor Bullock

With a rate hike all but certain, what Governor Michele Bullock says about the next interest rate move will be the main driver.

Australia’s July inflation came in hotter than expected. Monthly Consumer Price Index (CPI) jumped 1.0% versus expectations of 0.8%, while annual inflation remained elevated at 3.5%. More importantly, trimmed-mean inflation remained unchanged at 3.6%, reinforcing concerns that underlying price pressures remain persistent.

The RBA also highlighted risks from higher energy prices, the Middle East conflict, strong investment and persistent domestic cost pressures. Governor Bullock recently said some upside inflation risks appeared to be materialising.

Australian Gross Domestic Product (GDP) increased 0.4% in Q2. However, the economy is losing momentum, with annual GDP growth of 2.1% in the same period, down from 2.5% in the prior quarter.

Meanwhile, the Unemployment Rate rose to 4.6% in August, above forecasts for a steady 4.5% and the highest level since late 2021.

And that creates the RBA's dilemma: inflation is still too high, but growth and the labor market are cooling.

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

If the RBA delivers the 25 bps rate hike and Bullock signals that another increase remains possible, especially if inflation stays elevated, the AUD could receive the much-needed lift.

On the other hand, the Australian Dollar could come under intense selling pressure if Bullock signals that 4.60% could be the peak, or emphasizes weaker growth and a cooling labor market.

However, the reaction to the RBA decision could be short-lived as Wednesday’s August CPI report could prove more important than the monetary policy announcement, as it could determine whether markets price in another RBA hike after September.

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

“AUD/USD is holding right on the 200-day Simple Moving Average (SMA), which acts as a pivotal level after the latest slide. The 14-day Relative Strength Index around 35 is edging toward oversold territory, suggesting bearish momentum persists.”

“On the topside, initial resistance is located at the 100-day SMA around 0.7068, followed by the 50-day SMA at 0.7094 and then the faster 21-day SMA at 0.7133, which together define the main recovery hurdles for any corrective bounce. On the downside, a sustained daily close below the 200-day SMA at 0.7026 would expose the recent lows and open the path for a deeper decline toward the $0.6950 psychological level, followed by the 0.6900 round level,” Dhwani adds.