File image of Governor Bullock. Image still: ABC News.
The Australian Dollar would benefit from a 'hawkish' rate cut next week.
All eyes turn to the Reserve Bank of Australia (RBA) next Tuesday, where a 25 basis point interest rate cut will be issued.
The cut is already wrapped into the value of AUD, meaning the currency reaction rests with the guidance issued by Governor Michelle Bullock and her colleagues.
"There remains a solid positive impulse to underlying inflation. So while the fall in inflation will allow the RBA to cut rates next week, it will be a hawkish cut," says David Forrester, Senior FX Strategist at Crédit Agricole.
A 'hawkish cut' is financial market jargon that describes a cut that comes with warnings attached that we shouldn't expect any further generosity. This differs from a 'dovish cut' in which a central bank points to a weaker economy and indicates it stands ready to deliver more.
Under the hawkish scenario, we might expect Australian bond yields to rise, which in turn attracts foreign buyers to Aussie bonds, driving up the currency's value.
According to Crédit Agricole, the investment bank, money markets have reduced the amount of rate cuts it expects for the rest of 2025 from around 90bp earlier in the week to about 75bp following the release of above-consensus wage and labour market data.
"The trade truce between the U.S. and China is also contributing to the reduction in market pricing for rate cuts," says Forrester.
"A hawkish cut by the RBA next week could see investors further reduce their rate cut expectations," he adds. Crédit Agricole is a buyer of the Aussie Dollar against the Euro.
Australia announced this week that the economy added 89K jobs in April, up from 36.4K and breezing past expectations for 20K.
In response, economists at ANZ update their forecasts for future RBA cuts, "given there is less urgency to ease over the coming months."
A strong labour market aside, economists at ANZ reckon the decision by the U.S. to step back from its maximalist tariff position will also give the RBA reason to take it slow.
Following the April 02 'Liberation Day' tariffs, ANZ had expected 25bp cuts in May, July and August, getting the cash rate to around a neutral level of 3.35%.
"We now expect 25bp rate cuts in May and August this year, with the final 25bp of easing in Q1 2026. That latter cut comes with a little more uncertainty than the 2025 easings," says ANZ economist Adam Boyton.