As the Reserve Bank of Australia (RBA) prepares to announce its decision on interest rates tomorrow, market expectations lean heavily toward a 25-basis-point reduction, bringing the cash rate to 4.1%. This forecast follows recent data revealing that headline CPI, trimmed-mean inflation, and Q4 GDP all underperformed relative to the RBA’s projections. However, with money markets having largely priced in such a move for the past three weeks, investors are looking for additional guidance on the central bank’s future rate-cutting path. A signal for more cuts—or, alternatively, a surprise decision to hold rates—could alter market expectations.
A decision to leave rates unchanged would likely catch the market off guard, potentially sending the Australian dollar (AUD) surging against the US dollar. The usual monetary policy statement will accompany the rate decision, and if the RBA continues to assert that “underlying inflation remains too high,” this could dampen expectations for further rate cuts. Given that trimmed-mean inflation is still above the RBA’s target range of 2-3%, it is expected that this language will remain in place.
Alongside the rate announcement, the RBA will release its quarterly Statement of Monetary Policy (SOMP), offering a revised economic outlook. This will provide clarity on whether the central bank has downgraded its projections for the cash rate and inflation, thus confirming or dispelling market expectations of three or four rate cuts in 2025.
RBA Governor Michele Bullock is set to hold a press conference at 15:30 AEDT, which could offer further insight into the timing and magnitude of future cuts, allowing her to fine-tune the message and address any lingering market uncertainties.
RBA’s Likely Moves: Cautious but Flexible
My baseline expectation is that the RBA will implement a 25bp cut to 4.1%, accompanied by a slight downward revision of inflation and GDP forecasts. However, I do not anticipate the RBA signaling an aggressive rate-cutting path beyond this move. Rather, future decisions are likely to be made on a “meeting-by-meeting” basis, keeping the central bank’s options open.
Employment data remains robust, surpassing the RBA’s own projections, and external factors, including the potential impact of tariffs and political uncertainties ahead of Australia’s next federal election, will also weigh on the RBA’s decision-making. These variables make it unlikely that a second rate cut will occur in April or May. While June remains a potentially live meeting, it is too early for the RBA to indicate this with any certainty.
RBNZ’s Dovish Stance May Support AUD/NZD
Meanwhile, the Reserve Bank of New Zealand (RBNZ) is widely expected to cut its cash rate by 50 basis points this Wednesday, bringing it down to 3.75%, its lowest level since October 2022. This would mark the RBNZ’s third consecutive 50bp cut and fourth reduction overall in the current cycle. Should this occur, New Zealand’s interest rate would fall below Australia’s by 35bp, potentially fueling further AUD/NZD gains.
If the RBNZ delivers a dovish 50bp cut while the RBA opts for a more cautious 25bp reduction, AUD/NZD could experience upward momentum, supported by the divergence in central bank policies. The 1-week implied volatility for AUD/NZD has been rising, indicating heightened expectations around the joint RBA-RBNZ announcements.
Futures Traders Shed Short Positions on AUD/USD
Futures data shows that traders have reduced their net short positions on AUD/USD in anticipation of the RBA’s decision, as well as due to a more favorable risk environment for commodity-linked currencies. Asset managers decreased their net-short positions by 16.5k contracts, the fastest pace in 20 weeks, while large speculators followed suit with a reduction of 9.7k contracts.
Despite these shifts, traders remain significantly net-short on AUD/USD, suggesting that there could be further unwinding in the coming weeks, especially if the US dollar undergoes a deeper pullback. As such, the outlook for commodity-linked currencies, including AUD, remains positive.
Technical Outlook for AUD/USD and AUD/NZD
The Australian dollar has been on a bullish trajectory, reaching the target I set based on the August low and rising 4.6% since the February low. With short positions being unwound and long positions building, the potential for further gains in AUD/USD exists, particularly if the RBA delivers a more dovish cut than anticipated.
In terms of technical levels, the 0.6320 region, identified as a key pivot point and high-volume node (HVN), could be an important area of interest for bullish traders looking for a pullback. That said, volatility is expected to increase around the RBA meeting, and unless the RBA surprises with a more dovish stance, any pullbacks may be limited.
For AUD/NZD, expectations around monetary policy have driven the pair to a year-to-date high of 1.1140. However, momentum appears to be waning as it nears resistance levels. If the RBNZ surprises with a less-dovish 50bp cut—or even a 25bp reduction—AUD/NZD could fall, particularly if the pair fails to break above the July high. Given recent choppy price action, further downside risks for AUD/NZD could materialize, especially if New Zealand’s economic outlook improves relative to Australia’s.
In conclusion, the markets will be closely watching tomorrow’s RBA decision and the subsequent developments from the RBNZ to gauge the broader outlook for both the Australian and New Zealand dollars.
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