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Overview

The Reserve Bank of Australia (RBA) will announce its May monetary policy meeting at 04:30 GMT today. With the market pricing a possibility of rate move, this is the first “live” meeting in almost three years.

The RBA ditched its long-held tightening bias in February, triggering hopes of a rate cut in the second half of the year. The talk of a rate move in May, however, gathered pace after the official data showed RBA’s preferred measures of underlying inflation averaged around 1.4 in the first quarter – well below the central bank’s 2%-3% target for the 13th straight quarter.  

What’s expected?

The RBA hasn’t moved the needle on interest rates since the last easing in August 2016. A majority of economists polled by Reuters at the end of April had said the RBA would maintain the status quo on May 7.

Meanwhile, 14 of the 26 economists polled by Bloomberg expect the central bank to cut the cash rate by 25 basis points to a new record low of 1.25%.

Australian cash rate futures put the probability of a 25 basis point rate cut at today’s meeting at 47%, according to Business Insider.

Impact on the AUD/USD

With markets divided on whether the RBA would cut rates, the doors seem open for a big move in the AUD.

AUD/USD could rise to 0.71 or higher if the central bank keeps rates unchanged, forcing those who priced in a rate cut to unwind their Aussie shorts.

On the other hand, the Aussie dollar will likely drop to 0.69 if the RBA cuts rates, forcing traders who bought the AUD in anticipation of status quo policy to unwinding their longs.

Also, the RBA may keep rates unchanged but drop strong hints of an impending rate cut, in which case, the upside in the AUD, if any, could be limited.

About the RBA rate decision

RBA Interest Rate Decision is announced by the Reserve Bank of Australia. If the RBA is hawkish about the inflationary outlook of the economy and rises the interest rates it is positive, or bullish, for the AUD. Likewise, if the RBA has a dovish view on the Australian economy and keeps the ongoing interest rate, or cuts the interest rate it is seen as negative, or bearish.