Australian Dollar Outlook - RBA Expected to Cut Rates to Record Low Tonight

The Australian dollar is trading at a critical point, as AUD/USD is aggressively testing a trendline that has served as support since October 2008. With the Reserve Bank of Australia (RBA) due to announce their rate decision tonight, a break in AUD/USD could occur in the near-term.

Reserve Bank of Australia Rate Decision - March 2

The Reserve Bank of Australia is anticipated to cut rates in their sixth consecutive meeting at 22:30 ET on Monday, with a Bloomberg News poll of economists calling for a 25 basis point cash rate target reduction to a record low of 3.00 percent. However, only a larger-than-expected rate cut or comments suggesting they will continue to reduce rates aggressively may weigh on the Australian dollar, with signs of neutrality likely to actually boost the currency. Overall, Australia is facing major headwinds from financial market instability, which has led to tighter credit conditions, as well as from both domestic and foreign demand. Indeed, global slowdown is hurting exports, something the Australian economy depends on for employment and broad growth. The situation has not been helped by significantly lower commodity prices, though it has served to cool inflation pressures, which leaves the RBA additional leeway to make monetary policy more accommodative in coming months.

From a technical perspective, here's what we're looking at:

First, the DXY index has broken higher, with the greenback surging above its 2008 highs, suggesting that the currency is likely to continuing gaining in the short to medium-term.

Second, AUD/USD has managed to hold above a key trendline that has served as support since October 2008 and sits at approximately 0.6320. However, if we see that the RBA's rate decision yields either a larger than expected rate cut or comments that the central bank will continue making monetary policy more accommodative, AUD/USD could break below that trendline to target the October 2008 low of 0.6007. On the other hand, indications that the RBA will leave rates unchanged going forward could provide a boost in the pair toward 0.6500. Based on our general outlook for the US dollar though, the odds may be in favor of an AUD/USD break lower.

DailyFX

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