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Aussie messed up the policy

Following Donald Trump, other representatives of the US administration called on the Fed to lower the Federal funds rate. Vice President Michael Pence and chief economic adviser to the head of state Larry Kudlow believe that the economy works very well and the time has come to further disperse it by easing monetary policy. However, the US central bank has not yet followed the White House. Moreover, his colleagues from Australia have the best chance of monetary expansion. According to estimates of the derivatives market, the likelihood that the RBA will reduce the cash rate to a record low of 1.25% at the May meeting, is at 50: 50. It is interesting that even here it can not do without pressure from politicians.

Australia will have Parliamentary elections on May 18, and regardless of who comes to power (for now, according to opinion polls, Labor is in the lead), the new government will focus on stimulating monetary and fiscal policies. A significant slowdown in GDP growth in the second half of 2018, cooling of retail sales and a fall in real estate prices require increasing consumer activity. It is possible that the Reserve Bank will become a hostage of the current ruling party. 17 out of 42 experts polled by Reuters expect that at a meeting on May 7 it will reduce the cash rate by 25 bp. Most experts believe that by the end of the year the rate may fall to 1% against the background of a significant slowdown in inflation.

Australian Inflation Dynamics and RBA Rates

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It should be noted that in recent months, the RBA's outlook has changed significantly. If in December Philip Lowe said that monetary policy could be tightened for the first time since 2010, in February he focused on keeping the rate at 1.5%, by April he began to hint at monetary expansion. If it does happen, the RBA will be the first central bank of a developed country to decide to reduce borrowing costs. According to AMP Capital, the beginning of the monetary easing cycle will lead to the peak of AUD/USD to 0.6.

While the "bears" on the aussie rely on the weakness of the Australian economy, "bulls", on the contrary, adopt external factors. BofA Merrill Lynch sees the analyzed pair at 0.78 by the end of the year, Goldman Sachs recommends buying it as the Chinese economy recovers. Even the best forecaster of Bloomberg, during the end of the first quarter Tempus Inc expects the growth of AUD/USD to 0.74 by the end of 2019. Donald Trump, who announced an increase in tariffs for imports from China, could spoil the karma for aussie fans. The market was confident that Beijing and Washington were about to sign the deal, but such threats undermined this belief, contributing to the deterioration of the global risk appetite.

Technically, the implementation of the "Expanding wedge" and AB=CD patterns reinforces the risks of continuing the Australian dollar's downward hike to the target by 161.8% according to the latest model. It corresponds to $0.687.

The material has been provided by InstaForex Company - www.instaforex.com