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The Australian Dollar is lower by more than half a per cent against the Dollar, Euro and Pound.
The 25 basis point cut from the Reserve Bank of Australia (RBA) was expected; however, the central bank didn't push against market expectations for further easing.
The consensus expected the guidance to cool expectations for further rate cuts, judging that inflation was still too cheeky to allow the RBA to drop its guard.
However, the fall in the Aussie Dollar and bond yields indicates the RBA isn't as concerned about inflation as it was as recently as April and is minded to continue with further cuts.
Money market pricing via the swap markets corroborates this, revealing investors now think the RBA is willing to step up the tempo, possibly even opting for a third 25bp later this year.
"AUD/USD fell by 0.5% after the Reserve Bank of Australia (RBA) cut the cash rate by 25bp to 3.85% today," says Samara Hammoud, an analyst at Commonwealth Bank of Australia. "In its post‑meeting statement, the RBA noted that inflation continues to ease and wage growth has softened."
The RBA also made modest downward revisions to its GDP growth and inflation forecasts, another signal that it has turned slightly more 'dovish'.
For AUD, this shift in tone poses a slight headwind. "The commentary at the media conference also showed a more dovish tone than what we heard in February and even April," says Lucy Ellis, Chief Economist for the Westpac Group.
Above: GBP/AUD at daily intervals.
The RBA looks relaxed about inflation, saying the trimmed mean inflation measure (the RBA's core inflation gauge) has returned to within the 2–3% target band and is expected to stabilise around the midpoint throughout the forecast period.
Headline inflation is forecast to rise temporarily due to unwinding subsidies, but then ease back to target.
"We see no reason to adjust our view that the cash rate will be cut twice more this year (in August and November), taking it to 3.35% by year-end," says Westpac's Ellis.