Wall Street rises as materials and crypto stocks offset continued bond sell-off
Investing.com-- The Reserve Bank of Australia is widely expected to leave interest rates unchanged on Tuesday after a sharper-than-expected moderation in inflation, with markets focused on how the central bank balances improving price pressures against signs of a cooling housing market.
The RBA is expected to keep its cash rate at 4.35%, according to economists.
Get more insights on key central bank decisions by subscribing to InvestingPro -- at 55% off now
Westpac expects the central bank to retain a "hawkish" posture while assessing incoming data, saying the softer second-quarter inflation figures could give policymakers confidence that price pressures are easing under existing settings.
Australia's second-quarter CPI surprised on the downside, with headline inflation easing to 3.9% year-on-year and trimmed-mean inflation falling to 3.6%.
That was below the RBA's previous forecasts and strengthened the case for an extended period of steady rates.
"Collectively, price pressures are easing faster than the RBA envisaged, strengthening the case for an extended hold through year-end," ING analysts said in a recent research note.
The latest data suggest the impact of restrictive monetary policy is becoming more visible.
Westpac said national home values fell 0.7% in July, leaving prices 1.6% below their March peak, while weakness has broadened across major cities. Household spending, however, has remained relatively resilient, rising 0.8% in June and 1.3% over the second quarter.
Westpac expects the housing weakness to remain an "air pocket" rather than develop into a prolonged downturn, and has removed two previously expected rate hikes while bringing forward its forecast for subsequent rate cuts to August 2027.
How will AUDUSD react?
For markets, a straightforward hold is likely to have limited impact because it is already fully priced, leaving the RBA's language as the main source of volatility.
A clearly dovish message, particularly any acknowledgement that inflation is returning to target faster than expected, could weigh on the Australian dollar and reinforce expectations for eventual rate cuts.
The AUD/USD pair was around 0.706 by 05:02 GMT on Aug. 10, with Westpac forecasting 0.71 by September and 0.72 by year-end.
How will the ASX 200 react?
The S&P/ASX 200 could respond positively to a dovish shift as lower rates would improve the outlook for interest-sensitive sectors and valuation.
The index enters the decision after recently closing at a record high, raising the risk of profit-taking if the RBA offers little fresh support.
The ASX 200 had risen sharply ahead of the June decision but reversed gains after the RBA held rates following three hikes.
Markets will also look beyond Tuesday's decision to Governor Michele Bullock's testimony on Friday, while U.S. inflation data later in the week could provide a separate catalyst for AUD/USD and Australian equities.
