AUD/USD: Rate cut bets rise as RBA signals confidence in inflation progress

RBA signals growing confidence in achieving inflation target
Traders boost odds of a 25bps rate cut in February to two-in-three chance
AUD/USD drops sharply, testing key uptrend support below 0.6400

RBA’s pending pivot

The Reserve Bank of Australia (RBA) is edging closer to cutting interest rates, signalling growing confidence that inflation is sustainably moving towards its 2.5% target. The bank also dropped the phrase about not ruling anything in or out, suggesting the next rate move could still be higher, but this shift is telling.

Contrast the tone of that the RBA said last month: “This reinforces the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range.”

To what it said today: “Recent data on inflation and economic conditions are still consistent with these forecasts, and the Board is gaining some confidence that inflation is moving sustainably towards target.”

While it reiterated that underlying inflation remains "too high," there were several dovish tweaks in the December statement.

It noted wage pressures had eased “more than expected” and that some of the upside risks to inflation “appear to have eased.” It added that incomes and consumption had recovered “a little slower than forecast.”

The bank acknowledged recent data on economic activity have been mixed, “but on balance softer than expected.”

Telling.

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