Aussie Rallies Following an Expected Cut to the RBA Target Interest Rate

DailyFX

THE TAKEAWAY: RBA cuts the target interest rate 25 bps to 2.50%, as expected -> RBA says inflation to remain on target -> Aussie rallies

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The Aussie rallied 50 pips against the US Dollar on the announcement that the Reserve Bank of Australia cut its target interest rate from 2.75% to 2.50% in its August meeting.

The 25 basis point cut to the target rate was expected by 26 of 27 Bloomberg surveyed economists and therefore did not have the Aussie negative effect that is usually expected from a rate cut. The target interest rate was last cut in May from 3.00%, and the rate has been cut 2.25 percentage points since November 2011.

Regarding inflation, the RBA said it expects the inflation rate to remain within its 2-3% target over the next 1-2 years, following the 2.5% annual inflation rate seen in Q1 of this year. The RBA further commented that it will adjust policy to keep inflation consistent with the target. Following this month’s 25 basis point target rate cut, the RBA did not repeat its message from July, which was that inflation provided scope for further easing.

The Australian economy expanded 1.5% in Q1 of this year from the first quarter of 2012, which was the slowest annual expansion in nearly two years. Today, the RBA said that below trend growth is expected to continue in the near term, and the economy is adjusting to lower levels of mining investment.

It might have been the slight change in commentary regarding inflation, possibly implying an end to the rate cuts for the time being, that led Aussie traders to send AUD/USD 50 pips higher. The pair is trading around 0.8975 at the time of this writing, and AUD/USD might see resistance around the key 1.9000 level.

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AUDUSD Daily: August 6, 2013

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Aussie_Rallies_Following_an_Expected_Cut_to_the_RBA_Target_Interest_Rate_body_audusd.png, Aussie Rallies Following an Expected Cut to the RBA Target Interest Rate

Chart created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .

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