Reserve Bank of Australia Preview: Market players looking for tightening hints

The Reserve Bank of Australia is having a monetary policy meeting and will announce the resulting decision on Tuesday, December 7. Australian policymakers are expected to, once again, hold their fire and keep the current policy on hold after abandoning the yield-curve control in November. The cash rate will likely stand at 0.1%, and financial facilities at $4 billion per week, the latter to be reviewed in February.

Inflation and wages

Meanwhile, the annual inflation rate in Australia fell to 3.0% in Q3 2021 from an over one decade high of 3.8% in the previous quarter. Q2 inflation spurred speculation that the RBA would have to tighten its monetary policy sooner than their planned 2024. Also, the seasonally adjusted wage price index rose by 2.2% YoY in Q3, the highest reading since the pandemic began.

The RBA has tied wages growth at around 3% and underlying inflation between 2% and 3% to a rate hike. "Depending on the trajectory of the economy at that time, the board judges that this outcome could be consistent with the first increase in the cash rate being in 2024,"  policymakers repeated in their latest November statement.  No changes to such a view are expected this time. If something, market players will be looking for clues of whether Australian policymakers would consider additional tightening beforehand.

Most likely, the Reserve Bank of Australia will include a cautious note amid the newly discovered Omicron coronavirus variant, which led to travel restrictions in the country, although no fresh lockdowns were announced. Finally, the central bank has maintained an optimistic outlook of the economic progress within the ongoing pandemic, something that should not surprise investors.

AUD/USD possible scenarios

The AUD/USD pair bounced from a fresh 2021 low of 0.6992 at the beginning of the week, correcting extreme oversold readings.  Nevertheless, the current advance is the result of the broad greenback’s weakness, which is following the lead of sharply lower US government bond yields.

The pair currently trades in the 0.7030 region, and the daily chart shows that technical indicators are heading higher, although still within extreme levels, reflecting the absence of solid buying interest. In the mentioned time frame, the 20 SMA maintains its firmly bearish slope below the longer ones and roughly 200 pips above the current level.

The corrective advance may continue with RBA hinting at sooner tapering, quite an unlikely scenario. However, strong selling interest is waiting at around the 0.7100 level, a possible bullish target. On the other hand, a disappointing decision may undermine further the aussie and result in a decline toward the 0.6960 price zone. A steeper decline could be expected in the case US Treasury yields recover and push the greenback higher.