Australian Dollar Slips as RBA Cuts Rates and Flags Trade War Risks
The Australian dollar declined on Tuesday after the Reserve Bank of Australia (RBA) delivered a widely expected 25 basis point interest rate cut, bringing the benchmark cash rate to a two-year low of 3.85%. The move, fully priced in by markets since the announcement of U.S. tariffs in early April, was accompanied by cautious commentary from the central bank regarding both global and domestic economic headwinds. The RBA cited easing inflation and growing risks from an escalating global trade war as key drivers behind the decision, reinforcing expectations of continued monetary easing in the coming quarters.
While the RBA’s action was in line with investor forecasts, the tone of the accompanying statement was distinctly dovish. The central bank projected weaker economic momentum due to slowing global trade and acknowledged that its own economic forecasts incorporated an assumption of 85 basis points in total rate cuts from the previous 4.10% level. That guidance has reinforced bets that the cash rate could be trimmed further, possibly down to between 3.10% and 3.35% by year-end.
Highlights:
RBA cuts benchmark interest rate by 25 bps to 3.85%, a two-year low, citing inflation progress and global trade risks.
Central bank signals more rate cuts likely, with projections incorporating 85 bps of easing from 4.10% peak.
Australian dollar dropped 0.5% to $0.6428, retracing Monday’s rally triggered by Moody’s US downgrade.
Support for AUD seen at $0.6388 and $0.6358, with resistance at $0.6500 and $0.6515.
RBA’s new economic projections suggest higher unemployment and slightly lower inflation going forward.
Core inflation cooled to 2.9%, now within the RBA’s 2-3% target band, far below its late-2022 peak of 6.8%.
Three-year Aussie bond futures rose, while 10-year yields eased 5 bps to 4.455%.
Kiwi Dollar Weakens Amid Easing Bets Ahead of RBNZ Meeting
The New Zealand dollar also softened slightly, dipping 0.2% to $0.5919 after a strong overnight rally of 0.9%. Market participants are now firmly focused on the Reserve Bank of New Zealand (RBNZ), which is scheduled to meet on May 28. A 25 basis point rate cut to 3.25% is broadly expected, with projections suggesting that the RBNZ will soon conclude its easing cycle, having already slashed rates by 200 bps since tightening began.
Markets anticipate a terminal rate of around 3.0% or 2.85% by August, with the central bank likely to hold at that level for an extended period. The kiwi’s technical support is seen at $0.5850, while resistance stands at $0.5969 and $0.6022.
Highlights:
NZD dipped 0.2% to $0.5919, ahead of RBNZ’s May 28 policy decision.
RBNZ expected to cut rates by 25 bps to 3.25%, nearing end of its current easing cycle.
Market expectations for a terminal rate of 2.85% to 3.0% by August, with long pause anticipated thereafter.
Support for kiwi lies at $0.5850, resistance seen near $0.5969 and $0.6022.
