The Reserve Bank of Australia will hold its next meeting tomorrow, at which it will determine the future prospects for monetary policy. Before this event, the Australian dollar is gradually losing ground, paired with the dollar from multi-month highs.
The "retreat" began on Friday right after the Australian currency strengthened to the level of 0.7228. The last time the pair was at such heights was in February 2019, so it was not easy for buyers to stay in this price area. This is not the first assault on the 72nd figure – AUD/USD bulls have been attacking this price level for the third week. But on Friday, there was a fairly large-scale downward pullback, the echoes of which are still felt today. And if in other pairs, the dollar has already begun to gradually weaken, then in a pair with the Australian dollar, it is still holding on confidently. However, this is not surprising: amid recent events, traders are worried about tomorrow's RBA meeting. The former optimism of the regulator may be replaced by pessimism regarding the prospects for the recovery of the Australian economy in the second half of the year and next year. Macroeconomic reports which were recently published confirm this assumption. The coronavirus also worsened the situation, which actually "closed" the largest state in Australia.
Let me remind you that Australia began to gradually weaken quarantine restrictions in early May, which was somewhat earlier than many countries of the world. Thanks to this factor, many macroeconomic indicators began to gradually show signs of recovery – to the delight of investors and members of the Australian Central Bank. Throughout the last three meetings, RBA members have remained optimistic, stating that the coronavirus blow to the economy was weaker than earlier forecasts by the Central Bank. This position provided background support for the Australian dollar. Nobody expected (and does not expect) a tightening of monetary policy in the near future, but at the same time, there was confidence that the Central Bank would continue to maintain a wait-and-see attitude.
However, recent events have shaken the positions of the AUD/USD bulls. First, a coronavirus outbreak was recorded in Australia. To be more precise, the surge in incidence is observed mainly in the state of Victoria. During the day, 671 cases of COVID-19 were recorded there. A rise in fatality was also recorded last week. And last Thursday, doctors announced 723 new cases of infection - this is a new record for a daily increase, including during the first wave, which was observed in March-April.
Against the backdrop of such dynamics, local authorities have introduced Level 4 quarantine precautions. According to the new rules, residents are only allowed to leave their homes to buy food within 5 km of where they live. And in 5-million-strong Melbourne, a strict curfew was imposed: from eight in the evening to five in the morning. The city also banned wedding ceremonies, and only 10 people can attend funerals. From August 6, University education will be remote again and kindergartens will be closed. These restrictions will be in effect for at least six weeks.
The economic consequences of these decisions will not be long in coming, and not only at the local level: according to local experts, problems may arise with the supply chain far beyond Victoria, since the state has the largest container port in the country.
It should be noted that at its July meeting, the Reserve Bank of Australia actually ignored the "coronavirus factor", but tomorrow, the regulator's members are unlikely to discuss this topic.
In addition, the RBA is likely to comment on the latest macroeconomic data. Let me remind you that the consumer price index in quarterly terms collapsed into the negative area for the first time since the spring of 2016 - though not to the forecasted -2%, but to -1.9%. In annual terms, the indicator also turned out to be below zero: the indicator came out at the level of -0.3%.
All this suggests that the AUD/USD pair may decline to the base of the 70th figure at the end of tomorrow's meeting. This price target is already acting as a strong support level, so it will be difficult for the pair's bears to break through it without any "high volatility" informational reason (for example, if the RBA hints at further easing of monetary policy). But this scenario looks unlikely. Therefore, if the pair remains above 0.7000, longs will be relevant again – back to the borders of the 71st figure.
