The Federal Reserve Bank of Australia's decision is coming, what is the impact on the Australian dollar?

The market believes that the Reserve Bank of Australia will maintain stability on Tuesday, but some analysts expect to raise interest rates by another 25 basis points. Market analyst Matias Salord said the market expects the impact of the decision on the Australian dollar against the US dollar to be limited. Even in the event of a hawkish surprise, if market participants are worried about the economy, the move could ultimately be bad for the Australian dollar. The Australian dollar needs to maintain above 0.6800 to be able to achieve a more significant rise. If it falls below 0.6600 and stays there for a while, it could test the low of May.

At 12:30 Beijing time on July 4, the Reserve Bank of Australia will announce its interest rate decision. The market consensus is to keep monetary policy unchanged, and it is expected that this rate hike is very unlikely. However, analysts who expect stability maintenance and rate hikes are 50-50, and some analysts expect the Reserve Bank of Australia to raise interest rates by another 25 basis points this time.

Whether the Reserve Bank of Australia will raise interest rates on Tuesday remains controversial

However, this is a close call. The AUD/USD is still unable to leave the 0.6700 zone. The market expects the impact of this resolution on the AUD/USD to be limited.

At its June meeting, the Reserve Bank of Australia raised the cash rate by 25 basis points to 4.10%, a decision that came as another surprise as the market agreed there would be no change. The Reserve Bank of Australia later said the decision was made when inflation had peaked but was still too high, and it would take some time to return to the target range.

The Reserve Bank of Australia's cash rate target is as follows:

Since the June meeting, data have shown a strong labour market, with 75,900 jobs added and the unemployment rate falling to 3.6 per cent. The monthly consumer price index showed that annualised growth moderated modestly to 5.6 per cent in May; however, other core measures slowed less, to 6.1 per cent. The inflation data cooled expectations of another rate hike by the Reserve Bank of Australia.

Economic data still allows the Reserve Bank of Australia to raise interest rates further, which is the main reason for the rate hike. At the same time, the RBA is likely to pause rate hikes at this meeting and resume the rate hike cycle after that, as the interest rate market indicates.

The possible impact of the RBA resolution on the Australian dollar

Market analyst Matias Salord said that if the Reserve Bank of Australia raises interest rates this week, it will be the third in a row, which will benefit the Australian dollar. However, the impact may be limited as market participants have digested the future and remain hawkish. The RBA's focus is on inflation, and even weak economic data will not change that tone. RBA President Lowe warned that a modest rise in unemployment could bring inflation back to its 2-3% target.

Even in the event of a hawkish surprise, if market participants are worried about the economy, the move could end up being bad for the Aussie, just as the pound did after the Bank of England raised interest rates by 50 basis points.

The Australian dollar has been fluctuating around 0.6700 against the US dollar since March. In late May, the pair fell as low as 0.6460, peaked at 0.6900 two weeks later, and then fell sharply to 0.600. The future bias of the exchange rate is unclear, and the Reserve Bank of Australia seems unlikely to push the pair out of its current range.

From a broader perspective, the AUD/USD needs to maintain a consolidation above 0.6800 to provide enough evidence that the pair is ready for a larger rally. Conversely, if the AUD/USD falls below 0.6600 and stays there for a while, then a test of the May low seems possible.

The Aussie/USD dynamic is more likely to be driven by dollar and risk sentiment, as well as commodity prices, which are already providing signs of bottoming out. The rebound will be positive; however, with central banks around the world still raising interest rates, the Aussie/USD appears vulnerable to a recovery.

Australian dollar/US dollar daily chart

At 10:04 on July 4, Beijing time, the Australian dollar was trading at 0.6681/82 against the US dollar.