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

The Reserve Bank of Australia (RBA) is anticipated to increase the Official Cash Rate (OCR) by 25 basis points to 4.60% from 4.35% during a meeting on Tuesday, following three consecutive rate hikes. This decision will be disclosed at 04:30 GMT, alongside the Monetary Policy Statement (MPS), and followed by Governor Michele Bullock's press conference at 05:30 GMT.

Australia's inflation remains elevated, while labor market conditions are easing. The July inflation, measured by the Monthly Consumer Price Index (CPI), surpassed expectations at 1.0%, and annual inflation stayed high at 3.5%. However, trimmed-mean inflation remained constant at 3.6%, indicating persistent underlying price pressures.

The RBA also cautioned about potential risks from higher energy prices, the Middle East situation, strong investment, and ongoing domestic cost pressures. Governor Bullock recently acknowledged the emergence of upside inflation risks. Australia's economic growth slowed in Q2, with GDP increasing by 0.4% compared to the previous quarter's 2.5% annual growth.

Unemployment rose to 4.6% in August, higher than the forecasted 4.5% rate and the highest level since late 2021. This creates a dilemma for the RBA: inflation remains too high, but growth and the labor market are decelerating. If the RBA implements the 25 bps rate increase and Bullock suggests that further hikes are possible, the Australian Dollar (AUD) may gain momentum.

Conversely, if Bullock hints that 4.60% could be the peak or stresses weaker growth and a cooling labor market, the AUD could face significant selling pressure. The reaction to the RBA's decision may be short-lived, as the August CPI report on Wednesday could be more crucial for determining whether markets anticipate another RBA hike after September.

Dhwani Mehta, an analyst at FXStreet, provides technical levels for trading AUD/USD following the policy announcement. AUD/USD is currently near the 200-day Simple Moving Average (SMA), a key support level after recent weakening. The 14-day Relative Strength Index (RSI) at 35 is approaching oversold territory, suggesting ongoing bearish momentum.

Potential resistance lies at the 100-day SMA around 0.7068, followed by the 50-day SMA at 0.7094 and the 21-day SMA at 0.7133, which form the main recovery barriers. Conversely, a persistent drop below the 200-day SMA at 0.7026 could expose lower levels, potentially leading to a deeper decline to the $0.6950 psychological level and the 0.6900 round level.