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The Aussie has been gaining some strength in the days ahead of the RBA rate decision, thanks to improving commodity prices. The AUDUSD has also benefited from a weaker dollar ahead of the Fed. The upcoming central bank meetings could provide significant volatility in the pair, depending on what happens.

There is a unanimous consensus among economists that the RBA will keep rates unchanged on Tuesday. The focus shifts to what happens next, as investors look through the accompanying monetary policy statement for clues about the next meeting. And, it seems that RBA Governor Michelle Bullock is already laying the groundwork for the next move on rates to be to the upside.
 

RBA’s Next Hike?

Last week, Bullock surprised markets with unexpectedly hawkish comments in a speech to policymakers. She emphasized that the risk of inflation was elevated and toned down concern about the economic outlook. Following her remarks, many analysts signaled that the dovish tilt at the RBA had ended and that the next move would be to the upside. Now, it’s a matter of when.

Futures are pricing in a 100% chance of a rate hike sometime next year, a significant shift from just two weeks ago, when the market was pricing in a 50% chance of a cut. The change hasn’t been reflected by the Big Four banks yet. Three are still forecasting rates to remain unchanged next year, while Westpac is the lone holdout for a cut. However, those forecasts could be revised depending on the tone of the RBA’s statement and Bullock’s comments on Tuesday.
 

What to Look Out For

The shift in the RBA’s outlook comes as the economy continues to trundle along, but inflation remains elevated. If the economy were showing signs of slowing, the central bank might be hesitant to raise rates. On the other hand, if the economy were accelerating quickly, then a rate hike at the upcoming meeting would be expected. A growing economy gives the RBA room to raise rates, but it might not be enough to set off a new hiking cycle.

Another option is that the RBA will try to effectuate the change it wants through speech instead of policy. By talking tough on inflation and suggesting that it might raise rates, it could be enough to bring consumer prices back into line. This is not an uncommon tactic by central bankers called “jawboning”, and is notably being used by the BOJ right now. The increased focus on inflation would likely support the AUD if the RBA takes that option at the upcoming meeting.
 

It’s a Matter of Timing

Now that markets have become convinced there will be a rate hike, what will determine the currency move is the timing of the hike. At the moment, markets are pricing in the move in August. If the RBA steps up its rhetoric around inflation, that expectation could move sooner and support the AUD. On the other hand, softer rhetoric from the RBA could push expectations towards later in the year, weighing on the AUD.

Economists point to the next inflation report as pivotal for the outlook, suggesting the RBA could hike as soon as the February meeting. That could figure prominently in Bullock’s commentary, with markets in a holding pattern until the data comes out.

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