RBA Meeting Minutes: Understanding the RBA's rate hike probability

The Reserve Bank of Australia (RBA) recently published the meeting minutes for their July Board meeting, a key event that has put the spotlight on the incoming data ahead of the RBA's August Board meeting.

The financial market was put on notice last Thursday following a firm labour force report. Despite a record 400bp of RBA rate hikes, the unemployment rate remained steady at 3.5%, a record low. This prompted the interest rate market to increase the probability of an RBA rate hike in August from 20% to 50%.

A hotter-than-expected Q2 CPI report and robust retail sales this week could likely see the probability of an RBA rate rise in August rise to nearly 80%.

Inflation expectations for the Q2 CPI report

The market expectations are for headline inflation to fall to 6.2% YoY from 7%, with a fall in fuel prices being the key driver. The range of expectations varies from 5.8% to 6.7%.

The RBA's preferred measure of core inflation, the Trimmed Mean, is expected to fall to 6% YoY from 6.6% previously. The range of expectations varies from 5.8% to 6.3%.

If core inflation is equal to or higher than 6.1%, i.e., above the RBA's forecast of 6%, it would likely be enough to see the RBA raise rates in August by 25bp to 4.35%.

AU trimmed mean inflation chart

RBA forecasts

AUD/USD technical analysis

Last week, the AUD/USD ended lower at .6729 (-1.58%) as the US dollar rallied on Friday due to short covering ahead of this week's data-rich calendar and reports suggesting the BoJ will maintain its YCC unchanged at the Friday meeting.

In our previous AUD/USD update, we noted a double top at .6900c and suggested: "Until the AUD/USD mounts a successful attack on .6900c, allow for a retracement back towards the 200-day moving average at .6700c." The subsequent pullback reached the 200-day moving average, now at .6718c.

While the high level of event risk this week leaves us neutral on the AUD/USD's direction, we see support at .6720/00 as the bull/bear pivot. If the AUD/USD remains above this support, a rebound back towards .6800c is plausible. However, a sustained breach below .6720/00 may trigger a deeper decline towards .6600c.

AUD/USD daily chart

• _{TradingView: the figures stated are as of July 20, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}