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As expected, RBA cuts cash rate 25bp to 4.1%. But a hawkish tone in the forecasts and rhetoric cements our view that RBA will move slowly from here.

As was widely expected, the RBA cut the cash rate today, by 25bp, to 4.1%. Inflation has declined faster than the RBA’s previous forecasts implied, with underlying inflation running at an annual rate consistent with the 2–3% target over the second half of 2024. Getting inflation sustainably back down to target was the Board’s highest priority. Given these data and the likely near-term outcomes they imply, it would be difficult to say that the goal is off-track. In fact, the RBA’s revised forecasts now have trimmed mean inflation constant (dare we say ‘sustained’) at 2.7% out to mid 2027. The post-meeting statement also acknowledges that inflation could be declining a bit faster than earlier expected.

Following today’s cut, the RBA assesses policy to still be restrictive. It recognised the progress made on getting inflation to target. It also acknowledged that upside risks to inflation had eased and that ‘there are signs that disinflation might be occurring a little more quickly than earlier expected.’

In a hawkish move, though, the press statement highlighted that there was a risk of easing ‘too much too soon’, in which case disinflation would ‘stall’ and inflation would ‘settle above the midpoint of the target range’ – exactly what their forecasts show trimmed mean inflation doing. The Board attributed this to ‘lingering tightness’ in the labour market. The prior easing in the labour market had ‘stalled’ over the second half of last year.

The hawkish tone is also an outworking of the 2023 RBA Review. Recall that the RBA Review recommended, and the latest Statement on the Conduct of Monetary Policy adopted – a framing of the inflation target that requires the RBA to set policy ‘such that inflation is expected to return to the midpoint of the target’, even though ‘all outcomes within the target range are consistent with the Reserve Bank Board’s price stability target’. The Board will therefore be more discomfited by the revised forecasts for trimmed mean inflation than they would have been prior to the Review. It also explains why in the post-meeting press conference, the Governor emphasised that people still needed to be patient to get inflation down – down by a whole 0.2ppts.

These forecasts are predicated on the cash rate following a path traced out by market expectations at the time of the forecast review for three rate cuts by year-end. In the post-meeting press conference, the Governor made it quite clear that the Board thinks that this is ‘far too confident’. We can therefore rule out back-to-back cuts and continue with our existing view that they will hold rates steady at the next meeting in April. But, just as inflation surprised the RBA on the downside recently, it could do so again.

A key driver of the hawkish tone is the RBA’s view of the labour market. The unemployment forecasts were revised down to level out at 4.2%. While the Governor declined to provide an estimate of the unemployment rate that is consistent with full employment, the structure in the forecasts suggests that the staff are still working on the assumption of a NAIRU around 4½%. The RBA’s framework (appropriately) goes beyond this single number and considers other variables such as underemployment and vacancies. The labour market has been tighter than expected, and yet inflation has fallen faster than the RBA expected. In the media conference, the Governor expressed hope that maybe Australia could sustain a lower unemployment rate with inflation at target. But the RBA is not willing to bet on such an outcome, even though a number of peer economies had a similar experience in the years leading up to the pandemic, with NAIRU estimates being revised down repeatedly.

Some other elements of the forecasts also appear quite hawkish. Forecasts for public demand growth were revised up, driven by recent state and federal budget updates. Consumption growth was revised down, but only a little and to a profile that looks to be still well above consensus. Overall growth was characterised as ‘returning to its trend rate’. But even allowing for the slower expected population growth, actual GDP forecasts look a little softer than past assumptions of potential output. The fragility of the labour market outlook to an early turn down in the current strong growth in employment in the healthcare and social assistance industry – the subject of an SMP Box – was barely acknowledged.

By explicitly characterising the stance of policy following the cut as restrictive, the Board is implicitly suggesting that, as long as inflation keeps declining, further rate cuts are on the cards. But they are not promising anything and expect it will be a long road still before they can declare victory on that last few tenths of a percentage point of inflation. The final paragraph of the post-meeting statement was unchanged.

Overall, this was a hawkish set of communications. While the inflation and labour cost data have turned out a bit better lately (and we will know more about the latter tomorrow), there was not a further evolution in the RBA’s thinking around the supply side. A moderate, almost grudging, path of easing is likely from here.

Short term Elliott Wave in EURUSD suggests rally from 1.13.2025 low is unfolding as a zigzag structure. Up from 1.13.2025 low, wave A ended at 1.0533 and pullback in wave B ended at 1.021. Wave C higher is in progress with internal subdivision as a 5 waves. Up from wave B, wave (i) ended at 1.035 and pullback in wave (ii) ended at 1.0269. Wave (iii) higher ended at 1.043 and pullback in wave (iv) ended at 1.0399. Wave (v) higher ended at 1.0442 which completed wave ((i)) in higher degree.

Pullback in wave ((ii)) unfolded as a zigzag structure. Down from wave ((i)), wave (a) ended at 1.035 and wave (b) rally ended at 1.041. Wave (c) lower ended at 1.0278 which completed wave ((ii)) in higher degree. Pair has resumed higher in wave ((iii)). Up from wave ((ii)), wave (i) ended at 1.0385 and pullback in wave (ii) ended at 1.031. Wave (iii) higher ended at 1.0514. Expect dips in wave (iv) to correct cycle from 2.12.2025 low before it resumes higher. Near term, as far as pivot at 1.0204 low stays intact, expect dips to find support in 3, 7, 11 swing for further upside.

EURUSD 60 Minutes Elliott Wave Chart

EURUSD Video

https://www.youtube.com/watch?v=5TPvTnPRF-4

Daily Pivots: (S1) 0.6345; (P) 0.6359; (R1) 0.6372; More...

Intraday bias in AUD/USD is turned neutral as rebound from 0.6087 lost moment, as seen in 4H MACD, after hitting 0.6373. On the downside, break of 0.6234 support will suggest that the rebound has completed as a correction, and turn bias back to the downside for retesting 0.6087 low. Nevertheless, sustained break of 38.2% retracement of 0.6941 to 0.6087 at 0.6413, will pave the way back to 61.8% retracement at 0.6615.

In the bigger picture, fall from 0.6941 (2024 high) is seen as part of the down trend from 0.8006 (2021 high). Next medium term target is 61.8% projection of 0.8006 to 0.6169 from 0.6941 at 0.5806. In any case, outlook will stay bearish as long as 55 W EMA (now at 0.6504) holds.

Australian Dollar initially dipped after RBA's widely expected rate cut, but the move was short-lived as the currency quickly stabilized. RBA’s cautious tone on further easing provided underlying support for the Aussie. The central bank made it clear that while policy easing has begun, it is not committing to a rapid or continuous rate-cut cycle.

The updated economic projections justify RBA's cautious stance. Trimmed mean CPI is expected to stay at 2.7% throughout the forecast horizon, remaining above the midpoint of the RBA’s 2-3% inflation target. Meanwhile, the unemployment rate forecast was lowered to 4.2% and is expected to hold steady, indicating a persistently tighter-than-expected labor market.

RBA’s own cash rate assumptions suggest a drop to 3.60% by the end of 2025, implying just two more cuts before a prolonged pause. This guidance is against expectations for an aggressive easing cycle and could help limit AUD downside in the near term.

In the broader currency market, Dollar leads as the strongest performer of the day so far, recovering some of last week’s losses. Loonie follows as second, while Aussie holds third place. In contrast, Kiwi is the weakest, followed by Yen and Euro. Swiss Franc and Sterling are hovering in the middle of the pack.

Market focus now shifts to key upcoming economic data releases, including UK GDP, German ZEW economic sentiment, and Canadian CPI.

Technically, a main focus for today is whether USD/JPY could stage an extended rebound after drawing support from 38.2% retracement of 139.57 to 158.86 at 151.4 for the second time. Firm break of 55 4H EMA (now at 152.08) will be the first signal of bottoming. Firm break of 154.79 resistance will revive near term bullishness for resuming the rally from 139.57 at a later stage.

In Asia, at the time of writing, Nikkei is up 0.68%. Hong Kong HSI is up 1.94%. China Shanghai SSE is up 0.29%. Singapore Strait Times is up 0.25%. Japan 10-year JGB yield is up 0.0158 at 1.408.

RBA cuts rates, but warns against easing too much too soon

RBA lowered its cash rate target by 25bps to 4.10%, as widely anticipated, but signaled a cautious approach to further easing.

In its statement, the central bank emphasized that monetary policy will remain restrictive even after today’s reduction, warning that if rates are “eased too much too soon”, disinflation progress could stall and inflation could settle above the midpoint of the target range.

RBA acknowledged that some upside risks to inflation “appear to have eased”, and disinflation may be unfolding “a little more quickly than earlier expected”. However, it maintained that “risks on both sides” remain.

While today’s cut reflects the central bank’s confidence in recent progress, policymakers remain “cautious about the outlook”, reinforcing the idea that future easing will be data-dependent rather than pre-committed.

In the new economic projections:

• Headline CPI is now projected to rise to 3.7% by the end of 2025, before gradually easing to 2.8% by the end of 2026 (raised from 2.5%), and settling at 2.7% by mid-2027.
• Trimmed mean CPI is expected to remain at 2.7% throughout 2025, 2026, and mid-2027.
• Unemployment rate forecast was lowered to 4.2% across the projection horizon
• Year-average GDP growth was revised down by 0.1% to 2.1% for 2025, while 2026 remains unchanged at 2.3%, with growth expected to hold steady at 2.3% into 2026/2027.
• Cash rate assumptions suggest an average rate of 3.6% in 2025, followed by 3.5% in 2026.

Fed's Waller downplays tariff impact, warns against policy paralysis

Fed Governor Christopher Waller downplayed concerns that tariffs would have a significant, lasting impact on inflation, stating that their effect is likely to be “modest” and “non-persistent.” As a result, he favors “looking through” these effects when setting policy.

In a speech overnight, he emphasized that while economic uncertainty remains, Fed cannot afford to fall into a “recipe for policy paralysis” by waiting for absolute clarity regarding the administration's policies.

However, he conceded that tariffs could have a larger impact than expected, depending on their size and implementation. At the same time, he pointed out that other policies under discussion could have positive supply-side effects, helping to ease inflationary pressures.

Waller defended Fed’s decision to hold rates steady in January, arguing that the current economic data “are not supporting a reduction in the policy rate at this time.”

He left the door open for future rate cuts, stating that “if 2025 plays out like 2024, rate cuts would be appropriate at some point this year.”

Looking ahead

UK employment data is the main focus in European session, along with German ZEW economic sentiment. Later in the data, attention will be on Canada CPI. US will release Empire state manufacturing index and NAHB housing index.

AUD/USD Daily Report

Daily Pivots: (S1) 0.6345; (P) 0.6359; (R1) 0.6372; More...

Intraday bias in AUD/USD is turned neutral as rebound from 0.6087 lost moment, as seen in 4H MACD, after hitting 0.6373. On the downside, break of 0.6234 support will suggest that the rebound has completed as a correction, and turn bias back to the downside for retesting 0.6087 low. Nevertheless, sustained break of 38.2% retracement of 0.6941 to 0.6087 at 0.6413, will pave the way back to 61.8% retracement at 0.6615.

In the bigger picture, fall from 0.6941 (2024 high) is seen as part of the down trend from 0.8006 (2021 high). Next medium term target is 61.8% projection of 0.8006 to 0.6169 from 0.6941 at 0.5806. In any case, outlook will stay bearish as long as 55 W EMA (now at 0.6504) holds.

RBA lowered its cash rate target by 25bps to 4.10%, as widely anticipated, but signaled a cautious approach to further easing.

In its statement, the central bank emphasized that monetary policy will remain restrictive even after today’s reduction, warning that if rates are “eased too much too soon”, disinflation progress could stall and inflation could settle above the midpoint of the target range.

RBA acknowledged that some upside risks to inflation “appear to have eased”, and disinflation may be unfolding “a little more quickly than earlier expected”. However, it maintained that “risks on both sides” remain.

While today’s cut reflects the central bank’s confidence in recent progress, policymakers remain “cautious about the outlook”, reinforcing the idea that future easing will be data-dependent rather than pre-committed.

In the new economic projections:

• Headline CPI is now projected to rise to 3.7% by the end of 2025, before gradually easing to 2.8% by the end of 2026 (raised from 2.5%), and settling at 2.7% by mid-2027.
• Trimmed mean CPI is expected to remain at 2.7% throughout 2025, 2026, and mid-2027.
• Unemployment rate forecast was lowered to 4.2% across the projection horizon
• Year-average GDP growth was revised down by 0.1% to 2.1% for 2025, while 2026 remains unchanged at 2.3%, with growth expected to hold steady at 2.3% into 2026/2027.
• Cash rate assumptions suggest an average rate of 3.6% in 2025, followed by 3.5% in 2026.

Full RBA statement here.

At its meeting today, the Board decided to lower the cash rate target to 4.10 per cent and the interest rate paid on Exchange Settlement balances to 4 per cent.

Underlying inflation is moderating.

Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance. In the December quarter underlying inflation was 3.2 per cent, which suggests inflationary pressures are easing a little more quickly than expected. There has also been continued subdued growth in private demand and wage pressures have eased. These factors give the Board more confidence that inflation is moving sustainably towards the midpoint of the 2–3 per cent target range.

However, upside risks remain. Some recent labour market data have been unexpectedly strong, suggesting that the labour market may be somewhat tighter than previously thought. The central forecast for underlying inflation, which is based on the cash rate path implied by financial markets, has been revised up a little over 2026. So, while today’s policy decision recognises the welcome progress on inflation, the Board remains cautious on prospects for further policy easing.

The outlook remains uncertain.

Growth in output has been weak, private domestic demand is recovering a little more slowly than earlier expected, and there is uncertainty around the extent to which the recovery in household spending in late 2024 will persist. Wage pressures have eased a little more than expected, housing cost inflation is abating, and businesses in some sectors continue to report that it has been hard to pass on cost increases to final prices.

At the same time, a range of indicators suggest that labour market conditions remain tight and, in fact, tightened a little further in late 2024. Measures of labour underutilisation have declined, and business surveys and liaison suggest that availability of labour is still a constraint for a range of employers. Furthermore, productivity growth has not picked up, which implies that growth in unit labour costs remains high.

There are notable uncertainties about the outlook for domestic economic activity and inflation. The central projection is for growth in household consumption to increase as income growth rises. But there is a risk that any pick-up in consumption is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market than currently projected. Alternatively, labour market outcomes may prove stronger than expected, given the signal from a range of leading indicators.

More broadly, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slow growth in the economy and weak productivity outcomes while conditions in the labour market remain tight.

Uncertainty about the outlook abroad also remains significant. Geopolitical and policy uncertainties are pronounced and may themselves bear down on activity in many countries if households and firms delay expenditures pending greater clarity on the outlook. Most central banks have been easing monetary policy as they become more confident that inflation is moving sustainably back towards their respective targets. But market expectations for further easing have moderated somewhat in recent months, particularly in the United States.

Sustainably returning inflation to target is the priority.

Sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority. This is consistent with the RBA’s mandate for price stability and full employment. To date, longer term inflation expectations have been consistent with the inflation target and it is important that this remains the case.

The Board’s assessment is that monetary policy has been restrictive and will remain so after this reduction in the cash rate. Some of the upside risks to inflation appear to have eased and there are signs that disinflation might be occurring a little more quickly than earlier expected. There are nevertheless risks on both sides.

The forecasts published today suggest that, if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range. In removing a little of the policy restrictiveness in its decision today, the Board acknowledges that progress has been made but is cautious about the outlook.

The Board will continue to rely upon the data and the evolving assessment of risks to guide its decisions. In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.

Key Highlights

• GBP/USD started a fresh increase above the 1.2500 resistance.
• A key bullish trend line is forming with support at 1.2400 on the 4-hour chart.
• EUR/USD is struggling to clear the 1.0520 resistance zone.
• Crude Oil prices remained in a bearish zone below the $72.20 level.

GBP/USD Technical Analysis

The British Pound formed a base and started a fresh increase against the US Dollar. GBP/USD surpassed the 1.2450 and 1.2500 resistance levels.

Looking at the 4-hour chart, the pair settled above the 1.2550 level, the 100 simple moving average (red, 4-hour), and the 200 simple moving average (green, 4-hour). The pair even tested the 1.2630 zone before there was a minor pullback.

On the downside, immediate support sits near the 1.2515 level. It is near the 38.2% Fib retracement level of the upward move from the 1.2332 swing low to the 1.2630 high.

The next key support sits near the 1.2650 level or the 61.8% Fib retracement level of the upward move from the 1.2332 swing low to the 1.2630 high. The main support could be 1.2400. There is also a key bullish trend line forming with support at 1.2400 on the same chart.

Any more losses could send the pair toward the 1.2250 level. On the upside, the pair seems to be facing hurdles near the 1.2630 level. The next major resistance is near the 1.2665 level. The main resistance is now forming near the 1.2750 zone.

A close above the 1.2750 level could set the tone for another increase. In the stated case, the pair could even clear the 1.2800 resistance.

Looking at EUR/USD, the pair started a decent increase above 1.0450 but the bears are still active near the 1.0520 resistance.

Upcoming Economic Events:

• UK Claimant Count Change for Jan 2025 – Forecast 10.0K, versus 0.7K previous.
• UK ILO Unemployment Rate for Dec 2024 (3M) – Forecast 4.5%, versus 4.4% previous.

Daily Pivots: (S1) 1.0465; (P) 1.0486; (R1) 1.0505; More...

No change in EUR/USD's outlook as consolidation from 1.0176 is extending. Intraday bias stays neutral for now. Stronger rebound might be seen but outlook will remain bearish as long as 38.2% retracement of 1.1213 to 1.0176 at 1.0572 holds. On the downside, break of 1.0176 will resume whole fall from 1.1213. However, decisive break of 1.0572 will raise the chance of reversal, and target 61.8% retracement at 1.0817.

In the bigger picture, immediate focus is on 61.8 retracement of 0.9534 (2022 low) to 1.1274 (2024 high) at 1.0199. Sustained break there will solidify the case of medium term bearish trend reversal, and pave the way back to 0.9534. However, reversal from 1.0199 will argue that price actions from 1.1274 are merely a corrective pattern, and has already completed.

Daily Pivots: (S1) 1.2590; (P) 1.2613; (R1) 1.2648; More...

No change in GBP/USD's outlook and intraday bias stays neutral, with focus on 38.2% retracement of 1.3433 to 1.2099 at 1.2609. Rejection by this level will keep near term outlook bearish. Break of 1.2331 support will suggest that the rebound from 1.2099 has completed as a correction, and bring retest of 1.2099 low. However, firm break of 1.2609 will raise the chance of near term reversal, and target 61.8% retracement at 1.2923.

In the bigger picture, rise from 1.0351 (2022 low) should have already completed at 1.3433 (2024 high), and the trend has reversed. Further fall is now expected as long as 1.2810 resistance holds. Deeper decline should be seen to 61.8% retracement of 1.0351 to 1.3433 at 1.1528, even as a corrective move. However, firm break of 1.2810 will dampen this bearish view and bring retest of 1.3433 high instead.

Daily Pivots: (S1) 0.8981; (P) 0.9000; (R1) 0.9026; More…

USD/CHF is still extending the consolidation pattern from 0.9200 and intraday bias remains neutral. While deeper pull back might be seen, outlook will stay mildly bullish as long as 38.2% retracement of 0.8374 to 0.9200 at 0.8884 holds. On the upside, firm break of 0.9223 key resistance will carry larger bullish implication. However, sustained break of 0.8884 will indicate bearish reversal, and target 61.8% retracement at 0.8690 instead.

In the bigger picture, decisive break of 0.9223 resistance will argue that whole down trend from 1.0342 (2017 high) has completed with three waves down to 0.8332 (2023 low). Outlook will be turned bullish for 1.0146 resistance next. Nevertheless, rejection by 0.9223 will retain medium term bearishness for another decline through 0.8332 at a later stage.